The Information Content of Forgoing Tax Refunds: Evidence from Private Debt Contracts

• In Event: Taxes: Deductions, Refunds and Tax Risk Factors

Abstract

An open question is whether credible disclosures of corporate decisions provide valuable information about firms’ future prospects. In this study, I use a new setting, the decision whether to claim a tax refund, to address this question. I provide evidence that lenders rationally infer higher expected future profitability in the absence of observing a tax refund in setting the terms of debt contracts. Firms that forgo tax refunds report higher future profits and receive lower borrowing costs than do firms that claim refunds. These results are stronger in cases where there is greater information asymmetry between lenders and borrowers. The findings suggest that corporate decisions can credibly reduce information asymmetry about firms’ future prospects.

Author

• Daniel Saavedra, UCLA