The Determinants of Segment-level Tax Expense Disclosure

• In Event: Taxes and Financial Reporting

Abstract

In this study, we examine managers’ decision to report segment-level profit on a before-tax or
after-tax basis. A consequence of defining segment-level profit on an after-tax basis internally is that segment-level tax expense must be disclosed in the financial statements. Consistent with the management approach underpinning segment reporting rules, we find that firms which appear to be using an after-tax profit measure internally are more likely to report segment-level profit on an after-tax basis. However, this association is only present for operating segments that are defined on a non-geographic basis. In the sample of firms that define operating segments on a geographic basis, proprietary costs considerations, rather than internal reporting, appear to drive managers’ reporting decision. Overall, our results suggest managers use discretion to reduce disclosure quality of segment-level tax information for firms with geographic-based operating segments.

Authors

• Logan B Steele, University of Wisconsin-Madison

• Fabio Gaertner, University of Wisconsin-Madison

• Daniel Patrick Lynch, University of Wisconsin-Madison