Firm and Investor Responses to Uncertain Tax Benefit Disclosure Requirements

Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes, imposes mandatory disclosure requirements on public firms regarding uncertain tax positions reflected in their financial reports. While the number of studies examining the amount of the disclosed liability is growing, there is little focus on the actual quality of the disclosure itself. We examine determinants of FIN 48 disclosure quality among S&P 1500 firms by constructing a statistic to measure the quality of firm disclosures. We predict and find that firms with the highest proprietary costs of disclosure use discretion to jam the information contained in the disclosure. In stock market reaction tests, we find evidence to suggest that investors penalize firms for high disclosure quality, suggesting that investors are primarily concerned with the proprietary costs of the disclosure rather than increased transparency. These findings are interesting in light of the fact that regulators designed FIN 48 disclosure requirements to protect investors.