Disclosure of the Estimated Tax Liability from Repatriation of Permanently Reinvested Earnings

Abstract

Political, financial distress and investment mismatch costs are key costs of disclosing a firm’s estimated tax liability from repatriation. However, we show that they do not affect the manager’s disclosure choice absent other frictions. When proprietary disclosure costs are present, increases in political costs or the probability of an investment mismatch surprisingly increase the probability of disclosure whereas increases in financial distress costs or the costs of financing mismatched projects produce the more standard result that the probability declines. If instead there is a chance the manager is not informed (estimation of the tax liability is actually impractical), increases in non–proprietary disclosure costs are more likely to reduce disclosure relative to the proprietary cost case and the effect is greater the more likely it is that the liability cannot be estimated. Thus, our analysis offers a means of using changes in these costs to distinguish whether disclosure of the estimated tax liability is driven by proprietary disclosure costs or uncertainty about whether the manager has private information.