No. 40: Qualitative information disclosure: Is mandating additional tax information disclosure always useful?

Abstract

We study how the qualitative tax information disclosure affects firm behaviour. We create a novel measure of qualitative tax disclosure using machine learning algorithms. Using a UK reform as an exogenous shock that affected a group of firms, we show causal effects of mandating disclosure of qualitative tax information on firm operations. We find that affected firms increase their tax transparency through increasing the amount of relevant information disclosed in their annual reports and increase their tax payments, but there is no reduction in their aggressive tax planning, measured by changes in cash effective tax rates. We also find an increased importance of tax knowledge within the firm after the reform, as fees for outside tax advice decline. Finally, we discuss the quality of information that firms include in their tax strategy reports.

Participating Institutions

TRR 266‘s main locations are Paderborn University (Coordinating University), HU Berlin, and University of Mannheim. All three locations have been centers for accounting and tax research for many years. They are joined by researchers from LMU Munich, Frankfurt School of Finance and Management, WHU – Otto Beisheim School of Management, European School of Management and Technology in Berlin and Goethe University Frankfurt who share the same research agenda.