FASB Interpretation Number 48 (FIN 48) Disclosures and Corporate Innovation
54 Pages Posted: 17 May 2018 Last revised: 3 Nov 2020
Date Written: November 2020
In this paper, we analyze the real effect of financial statement tax disclosures on corporate innovation activities. In 2007, the FASB enacted FIN 48, which mandates the separate and more detailed disclosure of reserves for unrecognized tax benefits (UTBs). Using patent applications as a measure of corporate innovation, we employ a difference-in-difference research design with publicly listed U.S. firms as the treatment group and privately held U.S. firms not subject to the disclosure requirements as the control group. We hypothesize and find robust evidence that following the onset of FIN 48, the number of patent applications by publicly listed firms decreased. We also provide evidence that the decrease is attributable to incremental innovation, which is more subject to the UTB disclosure requirements. Our evidence provides support for the real effects of disclosure on innovation activities.
Keywords: Uncertain tax positions, FIN 48, Radical Innovation, Incremental Innovation, Patents, Backward Citations
JEL Classification: M40, M41, M48, O30, O38
Suggested Citation: Suggested Citation