DISCUSSION OF Schedule UTP: Stock Price Reaction and Economic Consequences

Abstract

A bernathy, Davenport, and Rapley (2013) (hereafter, ADR) is a measured next step in understanding the effects of disclosing uncertain tax positions. It is the logical, chronological addition to FIN 48 and Schedule M-3 research and casts further doubt on the separation of tax and financial reporting. Thus, it may be of immediate use to policy makers. Schedule UTP is the IRS analog of FIN 48. However, with FIN 48, the tension is whether the additional information is more beneficial to the market than the cost of disclosing that information to governmental taxing authorities for use in the audit process. The twist, in this case, is that Schedule UTP contains no public information, but only gives private information to a governmental enforcement agency. The actual impact of Schedule UTP on a firm’s financial health is educated conjecture for the market. ADR address the impact of the development of the Schedule UTP private information requirement in a straightforward, conventional manner. With an unweighted sample, they find that the initial announcement of the disclosure requirement had a negative overall market impact. It was followed by a lesser, positive market response to the announcement modifying some of the more burdensome disclosures. Weighting the sample by tax aggressiveness, they find no significance to the initial announcement, but a positive market response to the later disclosure-reducing announcement. Finally, ADR find FIN 48 uncertain tax benefits disclosed after Schedule UTP are less than those disclosed before Schedule UTP for both magnitude and difference model specifications.