Is Tax Return Information Useful to Equity Investors?

Abstract

I examine whether tax return information is useful to equity investors. I do so indirectly by exploiting unique features of the syndicated loan market, as evidence shows that lenders obtain tax returns from borrowers and that lenders’ private information is transmitted to equity markets when institutional investors are part of a loan syndicate. I find significant increases in tax expense valuation and decreases in tax-related market anomalies following the issuance of institutional syndicated loans, suggesting that equity investors find information about firm performance in tax returns that is useful for their trading decisions. I also find evidence that suggests institutional investors may determine their loan syndicate participation in part based on the value of tax return information. This study extends prior research and informs policy debates over public disclosure of corporate tax return information by providing evidence to support that tax returns can be useful to investor decision making.

Keywords: Tax Return Information, Syndicated Loans, Tax Expense Valuation, Tax Anomaly Returns

JEL Classification: G11, G14, M41, M48