Investor Response to Tax Related SEC Comment Letters

50 Pages Posted: 24 Apr 2018  

Alexander Edwards

University of Toronto - Rotman School of Management

Kenneth J. Klassen

University of Waterloo - School of Accounting and Finance

Karen Pinto

University of Waterloo - University of Waterloo, Faculty of Arts, School of Accounting and Finance, Students

Date Written: April 3, 2018

Abstract

We examine if and when investors systematically respond to SEC comment letters focusing on comment letters that contain tax-related issues. Using a sample of more than 10,000 comment letters from the Audit Analytics' SEC Comment Letter Database, we identify comment letters related to tax issues. Prior research has documented that the receipt of a comment letter can be important to future accounting disclosures but has generally failed to document investor responses. We focus on tax issues as prior research has documented changes in tax paying behavior following the receipt of comment letters by firms. Because of this change in future cash flows, we expect investors to revise their valuations of firms receiving tax related comment letters. We hypothesize, and find evidence consistent with more negative responses to tax related comment letters for tax aggressive firms. Our findings shed light on the role of comment letters in the capital markets and also contribute to the literature on the role of taxes in valuation.

Keywords: Taxes, SEC Comment Letters, Market Reaction, Tax Aggressiveness

JEL Classification: G18, H25, M41

Suggested Citation

Edwards, Alexander and Klassen, Kenneth J. and Pinto, Karen, Investor Response to Tax Related SEC Comment Letters (April 3, 2018). Available at SSRN: https://ssrn.com/abstract=3157739

Alexander S. Edwards (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Kenneth Klassen

University of Waterloo - School of Accounting and Finance ( email )

Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x38550 (Phone)
519-888-7562 (Fax)

Karen Pinto

University of Waterloo - University of Waterloo, Faculty of Arts, School of Accounting and Finance, Students ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada

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