Estimating the Likelihood of Future Tax Settlements
55 Pages Posted: 10 Jun 2020 Last revised: 25 May 2021
Date Written: June 1, 2020
Corporate income tax settlements represent a substantial cash outflow for many U.S. firms. This study develops an ex ante measure of future corporate income tax settlement likelihood using quantitative and qualitative information from Form 10-K. We find that both quantitative and qualitative 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, 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. Taken together, our study provides an ex ante measure of tax settlement likelihood that can be used by future researchers, and 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: Suggested Citation