Estimating the Likelihood of Future Tax Settlements Using Firm Fundamentals and Text Disclosures

62 Pages Posted: 10 Jun 2020

See all articles by Jared N. Jennings

Jared N. Jennings

Washington University in St. Louis

Joshua A. Lee

Brigham Young University

Erin Towery

University of Georgia

Date Written: June 1, 2020

Abstract

This study develops an ex-ante measure of the likelihood of future corporate income tax settlements using qualitative (i.e., language) and quantitative information (i.e., firm fundamentals) from the Form 10-K. We find that both qualitative and quantitative information are incrementally useful in predicting future tax settlements. We then use our new measure to examine the association between predicted future tax settlements and cash holdings. In contrast with prior research documenting a positive association between reserves for uncertain tax positions and cash holdings (Hanlon, Maydew and Saavedra 2017), we find that firms with a higher likelihood of future tax settlements hold less cash than firms with a lower likelihood of future tax settlements. In addition to providing an ex-ante measure of future cash outflows paid to tax authorities that can be used by future researchers, our findings suggest a more nuanced relation between tax uncertainty and cash holdings.

Keywords: Tax settlements, machine learning, textual analysis, tax uncertainty, cash holdings

JEL Classification: H20, H25, H26, M40, M41

Suggested Citation

Jennings, Jared N. and Lee, Joshua A. and Towery, Erin, Estimating the Likelihood of Future Tax Settlements Using Firm Fundamentals and Text Disclosures (June 1, 2020). Available at SSRN: https://ssrn.com/abstract=3615882 or http://dx.doi.org/10.2139/ssrn.3615882

Jared N. Jennings

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

Joshua A. Lee

Brigham Young University ( email )

United States
801-422-3154 (Phone)

HOME PAGE: http://https://marriottschool.byu.edu/directory/details?id=37414

Erin Towery (Contact Author)

University of Georgia ( email )

Terry College of Business
Athens, GA 30602-6254
United States

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