The Effect of the Mandatory Disclosure of Corporate Tax Returns on Reporting Bias

Abstract

What effect does the mandatory disclosure of corporate tax return information have on firms and investors? To answer this question, we build a structural model of reporting bias, which we test with a unique dataset of Turkish firms that have been mandated to publicly disclose their tax returns since 2009. In reduced-form analyses, we find that both book and tax income numbers can help predict firm performance and that investors react to both the initial tax and subsequent book income reporting. Book-tax differences that convey incremental information are particularly relevant. Structural estimates and counterfactuals are consistent with capital market incentives encouraging upward tax bias, on average, with substantial heterogeneity across subsamples defined by effective tax rates, firm size, and sector. 

Keywords: taxation, bias, disclosure, mandatory disclosure of tax returns, book-tax difference

JEL Classification: H25, H26, M41