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

Abstract

What effect will the mandatory public disclosure of corporate tax returns have on managers’ choice to bias book and tax earnings? To answer this question we build a structural model of reporting bias which we test with a unique dataset of firms that have been mandated to publicly disclose their tax returns since 2009. Within the framework of our model, we provide evidence that managers decrease the magnitude of both book and tax biases after the mandate. Moreover, we find that managers do not completely eliminate the biases because investors reward those firms that can maintain a permissible level of book-tax-difference. Our results support the contention that public availability of corporate tax returns will provide value-relevant information to investors. In turn, this will help move the reported book and tax earnings closer to their true economic level by reducing the amount of bias in both reports.

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

JEL Classification: H25, H26, M41