Disclosure Decisions Surrounding Permanently Reinvested Foreign Earnings

Abstract

ABSTRACTWe examine the determinants of disclosure decisions relating to the unrecognized deferred tax liability on permanently reinvested earnings (PRE). Prior research shows firm value is lower when firms disclose an estimated deferred tax liability for PRE, suggesting investors find this information useful. Since accounting rules provide managers with flexibility in disclosures about the estimated tax liability on PRE, managers may have discretion in the level of transparency related to these disclosures. We find that transparency relating to disclosures about the unrecognized deferred tax liability on PRE is decreasing in the complexity of the tax calculation. We find that disclosure transparency is increasing in the size of the estimated tax liability on hypothetical repatriation of PRE. However, we do not find that disclosure is more transparent when the tax department is more sophisticated or of higher quality. We predict, but do not find, that disclosure transparency is positively related to the overall disclosure environment of the firm.JEL Classifications: G30.