Kick the Can: What Can Tax Extenders Tell us About Financial Reporting Quality?

• In Event: Taxation

Abstract

The American Taxpayer Relief Act of 2012 (ATRA) retroactivity reinstated previously sunset tax provisions, such as a tax credit for research and development expenditures. We argue that if firms are materially affected by a retroactive tax law change, and this impacts investors’ ability to understand tax expense, then voluntary disclosure can be viewed as an unambiguous measure of higher quality tax financial reporting. We use DirectEdgar to hand-collect tax disclosures around the ATRA. This unique sample allows us to examine the determinants of disclosing the tax effects of the ATRA. From the determinants model, we create a measure of tax reporting quality and validate this measure using restatements. This new measure allows for novel insights into the role of tax reporting quality on analysts’ forecasts. The results of this test suggest that higher quality voluntary tax disclosures allow analysts to generate more accurate earnings forecasts.

Authors

• Sarah Parsons, University of Connecticut

• Francis Murphy, University of Connecticut