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Title:Investors’ valuation of tax certainty: Evidence from tax policy guidance
Author(s):Snyder, R. William
Director of Research:Lisowsky, Petro
Doctoral Committee Chair(s):Lisowsky, Petro
Doctoral Committee Member(s):Bednar, Michael; Davis, Jon; Sougiannis, Theodore
Department / Program:Accountancy
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):tax regulations, FIN 48, uncertain tax positions, R&D tax credit
Abstract:Tax regulations are the highest form of policy guidance issued by the U.S. Treasury Department, in coordination with the Internal Revenue Service (IRS), to assist taxpayers with calculating their U.S. tax liability. Although Treasury Regulations increase tax certainty because they have the full force of law, it is unclear how investors will react to such guidance. On the one hand, tax regulations can reduce firms’ risk of future audits and penalties by clarifying interpretations and procedures of tax law. On the other hand, such guidance can increase compliance costs and close lucrative tax planning strategies. This study uses 140 hand-collected releases of Treasury Regulations from 1994 to 2015 in an event-study methodology to infer from public companies’ stock prices how investors value tax certainty through policy guidance. Three main results emerge. First, across the sample period, investors react to tax policy guidance upon its issuance, but the direction depends on the type of guidance. Second, negative investor valuation occurs in the pre-FIN 48 period (i.e., before 2007) before detailed public disclosures on tax uncertainties are made available in firms’ financial statements thus are less salient to investors, but reverses and becomes positively valued post-FIN 48 when tax uncertainties are more salient to investors. Third, within the post-FIN 48 period, investors value tax policy guidance more positively for firms with greater amounts of uncertain tax positions, as inferred from R&D activities and the FIN 48 tax reserve, compared to firms with smaller uncertain tax positions. Collectively, this paper finds that tax policy guidance is value-enhancing when public information on tax uncertainties is most salient and material to investors.
Issue Date:2018-04-17
Rights Information:Copyright 2018 R William Snyder
Date Available in IDEALS:2018-09-04
Date Deposited:2018-05

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