Does Private Country-by-Country Reporting Improve the Tax and Earnings Information Environment for Investors?

Abstract

To combat tax avoidance, 58 countries have fully mandated multinational enterprises to disclose their income and economic activities to tax authorities on a country-by-country reporting (CbCR) basis from 2016 onwards. We examine whether this policy shock results in more informative tax expenses for capital market participants. Drawing on analyst tax forecasting, we develop a novel approach to capture the extent of misalignment perceived by capital markets and find that this misalignment declines after CbCR adoptions. Further, we demonstrate that CbCR improves tax information quality by increasing the value-relevance of tax surprise for investors and the accuracy of analysts’ effective tax rate forecasts. To better inform investors of firms’ tax positions, financial regulators are considering proposals requiring firms to publicly disclose country-level tax information. Contributing to the policy discussion, we suggest that the private CbCR disclosure already has materialized some of the information benefits for investors sought by these regulators.