Disclosure of Tax-Related Uncertainty and Market Liquidity

53 Pages Posted: 8 Apr 2021 Last revised: 18 Nov 2021

See all articles by R. Christopher Small

R. Christopher Small

University of Houston - C.T. Bauer College of Business

Jane Z. Song

University of Georgia - Terry College of Business

Date Written: August 26, 2021

Abstract

We examine whether the disclosure of tax-related uncertainty through unrecognized tax benefits (UTBs) resolves or exacerbates investors’ uncertainty about firm value based on evidence from investor trading behavior and information asymmetry around the time of the disclosure. We find that current year UTB additions are associated with reduced trading activity around the release of the 10-K and wider bid-ask spreads in the days following the 10-K release. We find no evidence of an association between UTB additions and contemporaneous abnormal returns. Our results suggest that UTB additions increase investor uncertainty and investors impound the information contained in UTBs into prices with a delay. Moreover, we find that our results are concentrated in firms that engage in greater tax avoidance and in firms with poorer financial reporting quality. We also find that the association between UTB additions and information asymmetry is concentrated among firms with low institutional ownership. Taken together, our results suggest that UTB disclosures increase short-term investor uncertainty about future firm value, which undermines the FASB’s goal of increasing the relevance and transparency of accounting for uncertain tax positions.

Keywords: Unrecognized tax benefits, liquidity, investor uncertainty, information asymmetry, abnormal returns, trading volume, bid-ask spreads

JEL Classification: D8, M41, M48

Suggested Citation

Small, R. Christopher and Song, Jane (Zhiyan), Disclosure of Tax-Related Uncertainty and Market Liquidity (August 26, 2021). Available at SSRN: https://ssrn.com/abstract=3815951 or http://dx.doi.org/10.2139/ssrn.3815951

R. Christopher Small (Contact Author)

University of Houston - C.T. Bauer College of Business ( email )

4750 Calhoun Road
Houston, TX 77204
United States

Jane (Zhiyan) Song

University of Georgia - Terry College of Business ( email )

J.M. Tull School of Accounting
610 S. Lumpkin St.
Athens, GA 30602
United States
30602 (Fax)

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