Corporate Tax Avoidance and Annual Report Tone Ambiguity
Posted: 22 Mar 2021 Last revised: 29 Mar 2021
Date Written: May 20, 2020
We examine how corporate tax avoidance relates to the tone of narrative disclosure in annual reports. Using a difference-in-differences matching approach, we find that firms engaging in more tax avoidance issue more ambiguous annual reports. The positive relation is more pronounced for firms with higher audit probability, greater analyst coverage, and weaker internal monitoring. We further find firms with greater tax avoidance are associated with earlier and more frequent voluntary disclosures to investors. Our findings indicate that tax-avoiding firms’ disclosure decisions are determined by the tradeoff between the benefits of reducing information asymmetry and the costs of tax-based proprietary information.
Keywords: tax avoidance; disclosure tone; mandatory disclosure; voluntary disclosure; textual analysis; readability
JEL Classification: G32, G34, M41, M42
Suggested Citation: Suggested Citation