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

See all articles by Michael P. Donohoe

Michael P. Donohoe

University of Illinois at Urbana-Champaign - Department of Accountancy

Gary A. McGill

University of Florida - Fisher School of Accounting

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

Donohoe, Michael P. and McGill, Gary A., The Effects of Increased Book-Tax Difference Tax Return Disclosures on Firm Valuation and Behavior (December 31, 2010). Journal of American Taxation Association, Volume 33, No. 2, pp. 35-65, Available at SSRN: https://ssrn.com/abstract=1543995

Michael P. Donohoe (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Gary A. McGill

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States
352-273-0219 (Phone)
352-392-7962 (Fax)

HOME PAGE: http://warrington.ufl.edu/fsoa/faculty/facultyinfo.asp?WEBID=1132

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