Disclosure of Corporate Tax Reports, Tax Enforcement, and Price Information
52 Pages Posted: 12 Mar 2015 Last revised: 13 Mar 2019
Date Written: March 2019
We analyze the effects of disclosing corporate tax reports on the performance of financial markets and the use of asset prices by the tax enforcement agency in order to infer the true corporate profits. We characterize the reporting strategy of the firm and the auditing policy of the tax enforcement agency in equilibrium. Our model suggests that, despite disclosure of the tax reports being beneficial for market performance (as the spread is smaller than under no disclosure), the tax agency might have incentives to not disclose the tax report when its objective is to maximize expected net tax collection. Our analysis generates empirical and policy implications relating the efficiency of tax agency monitoring on market liquidity, trading costs, and net tax collection. These implications may shed light on the current debate on the costs and benefits of public disclosure.
Keywords: Disclosure, Corporate Tax, Feedback Effects of Prices
JEL Classification: G12, G14
Suggested Citation: Suggested Citation