Financial Statement Tax Disclosures and Corporate Innovation

46 Pages Posted: 17 May 2018 Last revised: 10 Jul 2019

See all articles by Nathan C. Goldman

Nathan C. Goldman

North Carolina State University - Department of Accounting

Niklas Lampenius

University of Hohenheim - Faculty of Business, Economics and Social Sciences

Suresh Radhakrishnan

JSOM, University of Texas at Dallas

Arthur Stenzel

University of St. Gallen

Jose Elias Feres de Almeida

Federal University of Espirito Santo (UFES)

Date Written: July 8, 2019

Abstract

In this paper, we analyze the real effect of financial statement tax disclosures on corporate innovation activities. In 2007, the FASB issued FIN 48, which mandates the separate disclosure of reserves for unrecognized tax benefits (UTBs). Tax credits for innovation comprise a significant portion of this reserve because of their higher likelihood of being disallowed by the IRS upon audit. Given that UTB disclosure increases IRS scrutiny and, in consequence, decrease the likelihood of receiving tax credits, we expect net present values of innovation to decrease. 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 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, and we provide evidence that our findings are more concentrated amongst firms less likely to be audited by the IRS prior to FIN 48. Overall, our evidence provides support for the real effects of disclosures 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

Goldman, Nathan C. and Lampenius, Niklas and Radhakrishnan, Suresh and Stenzel, Arthur and Almeida, Jose Elias Feres de, Financial Statement Tax Disclosures and Corporate Innovation (July 8, 2019). Available at SSRN: https://ssrn.com/abstract=3174891 or http://dx.doi.org/10.2139/ssrn.3174891

Nathan C. Goldman (Contact Author)

North Carolina State University - Department of Accounting ( email )

Raleigh, NC 27695-8113
United States

Niklas Lampenius

University of Hohenheim - Faculty of Business, Economics and Social Sciences ( email )

Stuttgart, 70593
Germany

Suresh Radhakrishnan

JSOM, University of Texas at Dallas ( email )

Mail Stop SM 41
800 West Campbell Road
Richardson, TX 75080
United States
972-883-4438 (Phone)
972-883-6811 (Fax)

Arthur Stenzel

University of St. Gallen ( email )

Tigerbergstrasse 9
Saint Gallen, St. Gallen CH-9000
Switzerland

Jose Elias Feres de Almeida

Federal University of Espirito Santo (UFES) ( email )

Av. Fernando Ferrari, n. 514, Goiabeiras
Centro de Ciências Jurídicas e Econômicas
Vitoria, Espírito Santo 29075-910
Brazil
+5527992248737 (Phone)

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