An Examination of the Readability of Tax Footnotes: Determinants and Implications for the Valuation of Tax Avoidance

• In Event: Fraud Risk, Tax Avoidance, and Felony Fraud

Abstract

This paper investigates the information provided to stakeholders in corporate disclosures by examining the readability of tax footnotes. We find a positive association between tax avoidance and tax footnote readability for firms with relatively low levels of tax avoidance, suggesting managers highlight good performance by providing straightforward disclosures and conceal poor performance by providing information that is difficult to process. In contrast, there is no association between tax avoidance and tax footnote readability in firms with relatively high levels of tax avoidance. Consistent with these results, we find that investors discount (place a premium on) tax avoidance when the tax footnote is harder to read in low (high) avoidance firms. We provide evidence that the readability of the tax footnote has informational value beyond the overall readability of the annual report.

Authors

• Kerry Katharine Inger, Auburn University

• Michele Dawn Meckfessel, university of missouri-st louis

• Weiguo Fan, Virginia Tech University

• Mi Zhou, Virginia Tech University