Public Tax Disclosures and Investor Perceptions

Abstract

To reveal to the public whether firms pay their fair share of taxes, regulators increasingly mandate public tax disclosures. One assumption is that these disclosures help stakeholders, such as retail investors, identify aggressive tax avoiders. However, we find that retail investors become worse at identifying firms using aggressive avoidance methods when they receive designated tax disclosures alongside standard effective tax rate reconciliations. This experimental finding is consistent with our prediction rooted in attribute substitution theory that retail investors fixate on designated tax disclosures when forming perceptions about whether firms pay their fair share and their willingness to invest.

Keywords: public tax disclosure, corporate taxation, attribute substitution, retail investors

JEL Classification: C91, H26, M48