The Trade-Off between Reporting Complexity and Proprietary Costs in Voluntary Disclosure Decisions: Evidence from Voluntary Tax Disclosures
55 Pages Posted: 31 Jul 2017 Last revised: 13 Jun 2019
Date Written: June 2019
This study uses voluntary income tax disclosures to examine how managers trade off the relative costs and benefits of voluntary disclosure. We first provide evidence that income tax mentions in quarterly earnings announcements and during earnings conference calls are increasing in tax reporting complexity. These results are consistent with managers attempting to improve the quality of the information environment through enhanced voluntary disclosure. However, we also find that income tax mentions are decreasing in the likelihood of near-continuous IRS audit, suggesting that proprietary costs discourage managers from voluntarily disclosing tax information. When comparing the magnitude of each effect, reporting complexity is a relatively more significant consideration in managers’ voluntary tax disclosure decisions on average. Even for firms with the highest proprietary costs, tax reporting complexity still affects voluntary disclosure decisions. When we examine specific tax disclosure topics, the relative importance of complexity and proprietary costs varies in expected ways. This study furthers our understanding of the relative importance of various inputs to the voluntary disclosure decision and provides insight into the drivers of voluntary income tax disclosures – a previously underexplored yet important area as regulators and activists worldwide call for greater tax transparency.
Keywords: Income tax expense, analysts, conference calls
JEL Classification: H25, M41, M48
Suggested Citation: Suggested Citation