The Usefulness of Selective Tax Return Disclosure: Evidence from Form 5500

We examine whether and why tax returns can provide decision-relevant information to equity investors. Specifically, we examine whether information regarding defined-benefit pension plans contained in a publicly disclosed tax form, Form 5500, is useful to equity investors. Using intra-day returns and disclosure times obtained through a Freedom of Information Act request, we find that markets quickly react to Form 5500 information regarding pension funding and expenses. We also provide evidence that Form 5500 information is more strongly associated with market value and future cash contributions than comparable financial statement information. Further, although GAAP does not require firms to disaggregate the pension liability, we find evidence that the market values the components of the Form 5500 liability attributable to retired and terminated employees differently than the liability attributable to current employees. This paper documents that tax returns contain unique information content that investors can and do use, and contributes to the policy debate over whether corporate tax returns should be publicly disclosed

Is tax return information useful to equity investors?

In this study, I examine whether tax return information is incrementally useful to equity investors relative to publicly-available information, such as financial statements. To test this relation, I exploit unique features of the syndicated loan market, as prior literature shows that lenders obtain tax returns from borrowers, and that lenders’ private information is transmitted to equity markets when institutional investors are part of a loan syndicate. I find economically significant increases in tax expense valuation and decreases in tax-related market anomalies following the issuance of institutional syndicated loans, consistent with equity investors finding information about firm performance in tax returns that is useful for their trading decisions. I also document that tax returns are a valuable information source that can motivate institutional investor participation in loan syndicates. This study informs the important, ongoing policy debate over public disclosure of corporate tax return information and extends prior research by showing that investors use information from tax returns incremental to information in financial statements

Do Smoothing Activities Indicate Higher or Lower Financial Reporting Quality? Evidence from Effective Tax Rates

Prior literature is mixed as to whether smoothing through accruals indicates higher or lower financial reporting quality (Tucker and Zarowin 2006; Jayaraman 2008; Dechow et al. 2010). Motivated by the unique inter-temporal features and reporting incentives of tax expense, we provide new evidence on this debate by examining the link between smoothing of GAAP effective tax rates (ETRs) and the likelihood of financial restatements. Different from earnings smoothing’s insignificant relation with restatements, we find that ETR smoothing through tax accruals is associated with a lower likelihood of financial restatement and lower likelihood of tax-related financial reporting fraud. Further investigation reveals that such negative associations are stronger in firms with a higher level of discretion in tax reporting and when the demand and monitoring for transparent reporting is higher. We also document corroborating evidence that smoothing through tax accruals increases the informativeness of GAAP ETRs for predicting future cash ETRs. Collectively, our results contribute to the financial reporting and tax literatures by providing evidence that smoothing activities pertaining to tax accruals are consistent with higher financial reporting quality

Do U.S. Multinationals Use Income Shifting to Launder Corrupt Activity?

We investigate a) whether U.S. multinational companies use income shifting to engage in corruption and b) the effects of this income shifting on the welfare of non-U.S. countries' citizens. We use enforcement actions under the Foreign Corrupt Practices Act (FCPA) as shocks to the costs of corruption to establish initial minimum estimates of the effects of corruption on governmental efficacy and quality of life in affected countries. Consistent with theory, developed countries benefit from FCPA actions while developing countries are harmed. After examining the main effects of FCPA actions, we consider whether income shifting serves as a replacement indirect avenue when more direct corruption means are stifled by FCPA enforcement. We find that U.S. outbound income shifting increases following anti-corruption enforcement, and that this increased outbound income shifting mitigates the positive, and magnifies the negative, effects of anti-corruption enforcement actions. Overall, the results are consistent with income shifting acting as an alternate corruption vehicle

Auditors as a Vector for Diffusing Forecasting Knowledge

We explore auditors’ role in diffusing knowledge about forecasting among their clients. While management forecasts are not audited, prior research suggests that auditors affect management forecasting by serving a governance role that improves companies’ internal information environments and the credibility of managerial forecasts. We hypothesize that auditors influence managerial forecasting beyond the governance role by diffusing forecasting process knowledge and best practices across clients. We find that companies whose auditors have greater forecasting knowledge exposure forecast more accurately. However, auditor forecasting knowledge exposure is not associated with audit quality or auditor independence, consistent with auditors affecting management forecasting in a novel manner. Our results persist through a variety of robustness tests, including an extra-industry instrumental variable regression. Our research indicates a novel source of valuable knowledge auditors provide to clients and suggests that auditors improve their clients’ unaudited information environment by sharing knowledge across clients