Financial Statement Readability and Tax Aggressiveness

45 Pages Posted: 29 Oct 2018

See all articles by Christof Beuselinck

Christof Beuselinck

Catholic University of Lille - IESEG School of Management

Belen Blanco

The University of Adelaide

Sandip Dhole

Monash University

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Date Written: August 22, 2018

Abstract

This study investigates whether firms with aggressive tax planning strategies have less readable financial reports. In theory, tax-planning increases firm value through tax savings but can lead to a discount if applied too aggressively. Therefore, managers have an incentive to obfuscate their aggressive tax planning activities. One means of doing so is to make financial statements less readable and thus make aggressive tax planning activities more difficult to interpret for outsiders. Consistent with the information-based agency problem perspective of complex financial statements, we find a robust negative relation between financial statement readability and various proxies for tax aggressiveness. We further show that the negative association between financial statement readability and tax aggressiveness is weakened after the installation of Schedule M-3, a regulatory requirement for a detailed reconciliation of book income to tax income intended to make firms' aggressive tax planning activities more apparent to the Internal Revenue Service (IRS). Collectively, this evidence suggests that managers apply complex financial reporting strategies when the benefits of hiding tax aggressive policies exceed the costs, but rely less on obfuscation through such complexity when the benefits of obfuscation attempts are small.

Keywords: Annual Report Readability, Tax Panning, IRS Attention

Suggested Citation

Beuselinck, Christof and Blanco, Belen and Dhole, Sandip and Lobo, Gerald J., Financial Statement Readability and Tax Aggressiveness (August 22, 2018). Available at SSRN: https://ssrn.com/abstract=3261115 or http://dx.doi.org/10.2139/ssrn.3261115

Christof Beuselinck (Contact Author)

Catholic University of Lille - IESEG School of Management ( email )

3 Rue de la Digue
Office: A321
Puteaux, 92800
France
+33320545892 (Phone)

Belen Blanco

The University of Adelaide ( email )

10 Pulteney Street
Adelaide, South Australia 5005
Australia

Sandip Dhole

Monash University ( email )

Wellington Road
Melbourne, Victoria 3145
Australia

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

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