The Effects of Increased Book-Tax Difference Tax Return Disclosures on Firm Valuation and Behavior
48 Pages Posted: 29 Jan 2010 Last revised: 4 Nov 2011
Date Written: December 31, 2010
Abstract
We use event study techniques to gauge market participants’ ex ante perceptions regarding the benefits and burdens of the Schedule M-3, and structural break analysis to investigate whether managers make ex ante or ex post changes in book-tax differences as a result of this mandatory change in federal tax return disclosures. We find evidence suggesting investors believe ex ante the substantial increase in book-tax difference disclosures will increase future tax burdens and/or tax compliance costs. Investors also appear to believe the M-3 may be more costly for firms having the types of book-tax differences that attract additional IRS scrutiny (e.g., discretionary permanent differences) and when such firms are weakly monitored. Further, we find evidence of a substantial reduction in our proxy for discretionary permanent book-tax differences prior and subsequent to the implementation of the M-3 and other regulatory events suggesting both ex ante and ex post real effects on firm behavior.
Keywords: corporate tax, tax avoidance, book-tax differences, event study, policy regime
JEL Classification: G14, H25, H26, M48
Suggested Citation: Suggested Citation
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