Does mandatory tax disclosure mitigate tax expense anomaly? Evidence from FIN 48

Abstract

Financial Interpretation No. 48 (FIN 48) mandates the disclosure of uncertain tax positions for U.S. public firms. Exploring its impact on market efficiency, we find a reduction in the tax expense anomaly as documented by Thomas and Zhang (2011) for affected firms. The effect is stronger for affected firms with higher disclosure quality, accuracy, and transient institutional shareholding, and it cannot be explained by increased analyst tax forecasts or decreased predictability of tax expenses for future profitability. Our findings suggest that the mandatory tax disclosure under FIN 48 encourages investors to assess the implications of tax information for stock prices.