The Determinants of Segment-Level Tax Expense Disclosure
44 Pages Posted: 29 Oct 2016 Last revised: 29 Jul 2017
Date Written: July 28, 2017
In this study, we examine managers’ decision to report segment-level profit on a before-tax or after-tax basis. A consequence of defining segment-level profit on an after-tax basis internally is that segment-level tax expense must be disclosed in the financial statements. Consistent with the management approach underpinning segment reporting rules, we find that firms which appear to be using an after-tax profit measure internally are more likely to report segment-level profit on an after-tax basis. However, this association is only present for operating segments that are defined on a non-geographic basis. In the sample of firms that define operating segments on a geographic basis, proprietary costs considerations, rather than internal reporting, appear to drive managers’ reporting decision. Overall, our results suggest managers use discretion to reduce disclosure quality of segment-level tax information for firms with geographic-based operating segments.
Keywords: Segment disclosure, taxes, after-tax incentives
JEL Classification: H20, H25, M41
Suggested Citation: Suggested Citation