Do tax-based proprietary costs discourage public listing?

Abstract

This study investigates whether tax-based proprietary costs associated with being a public firm (i.e., costs resulting from increased visibility to the tax authority) discourage public listing. I exploit the introduction of a mandatory disclosure requirement (FIN 48) which generated a signal to the government regarding the uncertainty of public firms’ tax positions, allowing for more carefully targeted audits. I hypothesize and find evidence of an increased propensity to go private by public, tax aggressive firms following the enactment of the disclosure rule but prior to its adoption. Cross-sectionally, the effect is stronger among firms that are more sensitive to tax-based proprietary costs. Moreover, IPOs by tax aggressive firms exhibit a relative decline after FIN 48, consistent with the disclosure requirement deterring private, tax aggressive firms from going public. Overall, my findings suggest that mandatory disclosure rules imposing tax-based proprietary costs may discourage some firms from operating as public entities.