Noncompliance with Mandatory Disclosure Requirements: The Magnitude and
Determinants of Undisclosed Permanently Reinvested Earnings
Benjamin C. Ayers
University of Georgia
(706) 542-3772
bayers@terry.uga.edu
Casey M. Schwab
University of Georgia
(706) 542-3596
cschwab@terry.uga.edu
and
Steven Utke
University of Georgia
(706) 542-3633
sutke@uga.edu
May 28, 2013
_______________
Ayers, Schwab, and Utke gratefully acknowledge the support of the Terry College of Business and the
J.M. Tull School of Accounting. This paper has benefited from helpful comments from Ashley Austin,
Lisa Austin, Steve Baginski, Anne Ehinger, John Robinson, Bridget Stomberg, and Erin Towery.
Noncompliance with Mandatory Disclosure Requirements: The Magnitude and
Determinants of Undisclosed Permanently Reinvested Earnings
Abstract
Regulators and financial commentators recently have expressed concerns that the implications of foreign
earnings designated as permanently reinvested earnings (PRE) are not transparent to investors as a result
of missing or insufficient financial statement disclosures. To shed light on these concerns, we investigate
firms’ noncompliance with ASC 740 provisions requiring financial statement disclosure of PRE (and the
unrecorded deferred tax liabilities associated with PRE). Based on a sample of S&P 500 firms from 1999
to 2010, we find that (1) a significant portion of firms fail to comply with the mandatory disclosure
requirements for PRE, (2) noncompliance spans a long window of time and is an issue among even the
largest, most sophisticated firms in the U.S. capital markets, and (3) the amounts of undisclosed PRE (and
the related tax) are substantial in magnitude. Further analysis suggests that firms strategically choose not
to comply with the PRE (and related tax) disclosure requirements under ASC 740. We find that
compliance with the mandatory disclosure requirements for PRE increases with the materiality of the
unrecorded tax liability associated with PRE, for firms operating in more litigious or less competitive
industries, and after the enactment of the American Jobs Creation Act of 2004, which increased incentives
to disclose PRE.
Noncompliance with Mandatory Disclosure Requirements: The Magnitude and
Determinants of Undisclosed Permanently Reinvested Earnings
I. INTRODUCTION
U.S. corporations defer U.S. taxation on earnings of foreign subsidiaries until the earnings are
repatriated to the United States. Accounting Standards Codification (ASC) 740 requires companies to
accrue this future (deferred) U.S. income tax expense on their financial statements unless the company
declares the foreign earnings as permanently reinvested earnings (PRE) overseas. Prior studies examining
the consequences of the PRE designation provide evidence that the ability to avoid accruing deferred
taxes by declaring PRE impacts decisions regarding the location of foreign operations (Graham et al.
2011), the repatriation of foreign earnings (Graham et al. 2011; Blouin et al. 2012a), the amount and
location of foreign cash (Blouin et al. 2012a; Blouin et al. 2012b), and investments (Bryant-Kutcher et al.
2008; Hanlon et al. 2012; Edwards et al. 2013). Regulators and financial media commentators have
expressed concerns regarding the documented effects of PRE. They argue that PRE (1) has contributed to
the unprecedented $1.9 trillion in earnings stockpiled offshore by U.S. multinationals (Levin and Coburn
2012; Aubin 2013), (2) artificially inflates a firm’s balance sheet and income statement by reporting lower
deferred tax liabilities and tax expense, respectively (Levin 2012), and (3) results in inefficient capital
structures because of the level of cash trapped overseas (Linebaugh 2012).
Regulators and financial commentators have also expressed concerns that the implications of PRE
are not transparent to investors as a result of missing or insufficient financial statement disclosures (Tully
2011; Whitehouse 2011; Abahoonie and Barbut 2012; Hoffelder 2012). Specifically, the investment
community has raised concerns that current PRE disclosures make it difficult to assess how PRE impacts
reported earnings (Reilly 2012; Svensson 2012), domestic and foreign liquidity needs (Whitehouse 2011),
and foreign asset composition (i.e., cash vs. non-cash assets; Hoffelder 2012). Under ASC 740, firms
designating undistributed foreign earnings as PRE are required to disclose annually the cumulative
amount of PRE, along with either the amount of tax that would be due if the earnings were repatriated or
1
a statement that calculating the tax is not practicable. To shed light on recent concerns regarding the
transparency and sufficiency of PRE disclosures, we investigate firms’ noncompliance with the
mandatory disclosure requirements for PRE (and its related tax) and identify factors associated with any
noncompliance.
To examine noncompliance with required PRE disclosures, we analyze financial statement
disclosures of S&P 500 firms from 1999 through 2010. To identify firms required to disclose PRE, we
review the financial statement disclosures for two specific disclosures. First, we look for an explicit
disclosure of PRE or the tax due upon repatriation of PRE. If a firm discloses PRE or the tax due upon
repatriation of PRE in a given year, we classify the firm-year as a required PRE disclosure year. Second,
we review effective tax rate reconciliations for disclosure of a tax benefit of foreign earnings (i.e., firms
showing a lower effective tax rate that (a) is attributable to foreign earnings that are subject to a lower
current tax rate than the U.S. tax rate and (b) has not been offset by deferred U.S. taxes due on
repatriation of those earnings). To ensure the foreign tax benefit reported in the effective tax rate
reconciliation does not reflect foreign tax credits not attributable to PRE, we eliminate firm-year
observations in which the source of the tax rate benefit is ambiguous.1 This process yields a sample of
3,416 firm-year observations subject to the ASC 740 mandatory disclosure requirements. Using this
sample, we conduct our analysis in four stages.
In our first stage, we estimate the amount of PRE and the related tax due upon repatriation (TAX)
for each firm.2 Estimating PRE and TAX represents an important departure from prior studies that rely on
the assumption that PRE financial statement disclosures are accurate and forthcoming (i.e., PRE is
disclosed if it exists and the taxes on PRE are disclosed if they are practicable to calculate). This
1
Section 3.2 describes the method used to identify firms required to disclose PRE in detail. We confirmed the
validity of our method with an ASC 740 expert working for a Big 4 accounting firm and with a Big 4 accounting
partner serving large multinational S&P 500 clients with required PRE disclosures. Adding further credence that our
method allows us to correctly identify firms with PRE that fail to comply with disclosure requirements, we note that
85 percent of our sample firms that do not disclose their PRE amount (i.e., non-disclosers) acknowledge they have
PRE. See Appendix B for a sample disclosure for a firm acknowledging PRE but failing to disclose the PRE
amount.
2
Beginning in Section 3, we use variable names to differentiate between reported PRE (PREReported) and estimated
PRE (PREEstimated) as well as reported TAX (TAXReported) and estimated TAX (TAXEstimated). For simplicity, we do not
use these variable names in Sections 1 and 2.
2
estimation allows us to (a) quantify the economic magnitude of undisclosed PRE and TAX amounts and
(b) make stronger conclusions regarding firms’ compliance with mandatory TAX disclosures (i.e., the
impracticability of calculating TAX). We base our estimate of TAX on hand-collected annual effective
tax rate (ETR) reconciliation data, which provide the tax benefit associated with not recording deferred
tax expense on earnings designated as PRE. We estimate TAX as the three-year sum of accumulated tax
benefits (net of any expenses) associated with earnings designated as PRE during this period. While
estimating TAX using three years of data understates the actual tax due on repatriation of cumulative
PRE, this estimate should be sufficient to (a) provide a lower bound of undisclosed TAX, (b) evaluate
cross-sectionally how the magnitude of TAX influences disclosure, and (c) assess the practicability of
estimating TAX. We estimate PRE by first grossing up the estimated TAX by the difference between the
U.S. statutory rate and the firm’s foreign effective tax rate to produce an estimate of the foreign pretax
earnings classified as PRE. Since PRE is an after-tax number, we multiply the estimated foreign pretax
earnings by one minus the foreign effective tax rate to estimate the firm’s PRE. Correlation analyses of
our estimates of PRE and TAX with reported PRE and TAX for firms disclosing these amounts suggest
that our estimates are reasonable (i.e., estimated PRE and reported PRE are correlated at 0.57; estimated
TAX and reported TAX are correlated at 0.91) and should serve their intended purposes.3
This analysis provides several interesting conclusions regarding firms’ choices to comply with the
mandatory disclosure requirements of ASC 740. First, we find that a nontrivial percentage of sample
firms do not disclose PRE despite electing to designate a substantial amount of their earnings as PRE.
Specifically, we find that annually 11.7% to 18.2% of our sample S&P 500 firms required to disclose
PRE fail to do so, with estimated annual aggregate undisclosed PRE ranging from a low of $9.9 billion to
a high of $84.2 billion (and an estimated annual average undisclosed PRE per non-discloser ranging from
3
In addition, for firms required to but previously not disclosing PRE, we find that the correlation between estimated
PRE and reported PRE in the first year PRE is disclosed equals 0.51. Similarly, for firms required to but previously
not disclosing TAX, we find that the correlation between estimated TAX and reported TAX in the first year TAX is
disclosed equals 0.98. The high correlations in the first year of disclosure suggest it is unlikely that the calculation of
PRE and TAX is fundamentally more difficult for non-disclosers than it is for disclosers. See footnote 11 for
anecdotal evidence that TAX non-disclosers calculate TAX regularly despite disclosing that it is “not practicable to
calculate.”
3
a low of $320 million to a high of $1.96 billion). Regarding TAX disclosures, we find that annually
72.9% to 81.2% either disclose that TAX is not practicable to calculate or provide no mention of TAX at
all. The large percentage of firms not disclosing TAX is interesting given that (a) the majority of these
firms (71.1%) calculate and disclose the tax benefit associated with current year foreign earnings that are
deemed permanently reinvested annually in their effective tax rate reconciliation and (b) we are able to
derive reasonable estimates of TAX from the effective tax rate reconciliations.4 We estimate the annual
aggregate undisclosed TAX ranges from a low of $9.57 billion to a high of $82.23 billion (and the
estimated annual average undisclosed TAX per non-discloser ranges from a low of $60 million to a high
of $300 million).5 These results suggest that (a) a significant portion of firms fail to comply with the
mandatory disclosure requirements for PRE, (b) noncompliance spans a long window of time and is an
issue among even the largest, most sophisticated firms in the U.S. capital markets (i.e., S&P 500 firms),
and (c) the amounts of undisclosed PRE and TAX are substantial in magnitude.
In the second and third stages of our analysis, we examine the determinants of a firm’s choice to
comply with the mandatory PRE and TAX disclosure requirements, respectively. Given that the PRE
designation has been the source of considerable public scrutiny and the PRE and TAX disclosures, by
their nature, reveal strategic information regarding the firm’s investment abroad (i.e., the amount and
duration of earnings invested abroad and the related tax costs of repatriating such investment), we view
the related disclosures as costly and anticipate that compliance with the mandatory disclosure
4
This finding is also interesting given that (a) firms are able to calculate and record deferred tax liabilities on
foreign earnings not designated as PRE and (b) the financial reporting designation of foreign earnings as PRE has
no impact on the complexity of calculating potential taxes owed upon repatriation. For example, Cognizant’s
December 31, 2002 tax footnote contends that calculating the TAX on 2002 earnings designated as PRE is not
practicable because of the various methods by which such earnings could be repatriated in the future, despite the fact
that Cognizant calculates, records, and discloses the deferred tax liability on the same type of earnings (all related to
the same Indian subsidiary) from 2001 and earlier. We note that the methods of repatriation or tax owed upon
repatriation in 2002 did not vary based on whether a firm designated foreign earnings as PRE.
5
The range of the annual estimated aggregate undisclosed TAX is similar in magnitude to the range of the annual
estimated aggregate undisclosed PRE because the vast majority of firms do not disclose TAX, while a smaller
portion of firms fail to disclose PRE. As expected, however, the annual average undisclosed TAX per nondisclosing TAX firm is much lower than the annual average undisclosed PRE per non-disclosing PRE firm.
4
requirements will vary cross-sectionally with the associated costs and benefits of disclosure (e.g.,
Verrecchia 1983).6
We model a firm’s choice to comply with the mandatory PRE disclosure requirements as a
function of the magnitude of estimated PRE and estimated TAX as well as other variables previously
shown to influence disclosure decisions (i.e., that proxy for disclosure costs and benefits). We find a
positive association between PRE disclosure and estimated TAX but no association between PRE
disclosure and estimated PRE. These results suggest that concern over the magnitude of the unrecorded
TAX (i.e., the unrecorded liability associated with PRE) motivates PRE disclosure as opposed to the
magnitude of the PRE itself. We also find that firms operating in more litigious or less competitive
industries are more likely to disclose PRE, suggesting that legal concerns, which increase the cost of nondisclosure (e.g., Skinner 1994), and proprietary costs, which increase the cost of disclosure (e.g.,
Verrecchia 1983), are significant determinants of mandatory PRE disclosure compliance. Collectively,
these results suggest that firms strategically choose not to comply with the mandatory PRE requirements.
We model a firm's choice to disclose TAX similarly to the choice to disclose PRE. We find that
firms are more likely to disclose TAX if they operate in a less competitive industry (again consistent with
lower proprietary costs) or if they have lower institutional ownership (consistent with increased demand
for additional disclosures when information asymmetry is high). Interestingly, we find a negative and
significant association between TAX disclosure and estimated TAX, suggesting that firms are less likely
to disclose the TAX as the magnitude of the estimated TAX increases. This evidence is consistent with
firms choosing to disclose that estimating TAX is not practicable or provide no mention of TAX when the
financial statement impact of the TAX is larger. Consistent with Robinson et al. (2011), this evidence
6
For examples of articles in the public business press highlighting concerns regarding PRE and specific high-profile
examples, see: Fleischer, V. “Overseas cash and the tax games multinationals play,” The New York Times, October
3, 2012; Fisher, D. “Foreign tax reserves are ‘crack cocaine’ for earnings manipulation, study says,” Forbes.com,
October 25, 2012; Hoffelder, K. “Tax incentive helps multinationals repatriate 20% less, study says,” CFO.com,
November 12, 2012; Cohn, M. “Accounting option facilitates multinational earnings manipulation,”
Accountingtoday.com, October 12, 2012.
5
suggests that firms are less likely to comply with mandatory disclosure requirements if such disclosure
may reflect negatively on the firm (i.e., the firm has larger unrecorded tax liabilities associated with PRE).
In our final stage of analysis, we investigate how firms respond to the increased disclosure
incentives around the American Jobs Creation Act of 2004 (AJCA). The AJCA allowed firms to repatriate
foreign earnings at a substantially discounted tax rate under certain conditions. However, to take full
advantage of the provisions of the AJCA, firms must have disclosed the amount of their PRE in years
leading up to the AJCA (i.e., prior to June 30, 2003). By limiting the tax benefits of the AJCA repatriation
holiday to firms with adequate PRE disclosure, the AJCA created additional incentives to disclose PRE
(but not necessarily TAX) for firms anticipating future repatriation holidays similar to the AJCA.7
Accordingly, we expect PRE disclosure to increase in post-AJCA years. We also note somewhat
ironically that to determine the best course of action under the AJCA, a firm previously disclosing PRE
needed to estimate the financial statement and tax effects of repatriating their PRE (i.e., estimate the same
tax effects that firms could claim as being not practicable to calculate under ASC 740). Consistent with
the AJCA creating additional incentives to disclose PRE, we find a distinct increase in PRE (but not
TAX) disclosure in the years immediately following the AJCA.
This study makes three primary contributions. First, we address regulators’ concerns that the
implications of PRE are not transparent to investors due to noncompliance with the disclosure
requirements mandated by ASC 740. We provide evidence of significant noncompliance with PRE
disclosure requirements and what appears to be a particularly lenient application of the TAX disclosure
requirements, suggesting that regulators’ concerns are justified. Specifically, we find that a significant
percentage of firms fail to comply with the GAAP reporting requirements for PRE despite electing to
designate a substantial amount of their earnings as PRE. For those firms disclosing PRE, we find that the
vast majority choose either to disclose that TAX is not practicable to calculate or provide no mention of
7
Working to Invest Now in (WIN) America is a campaign supported by a coalition of 51 firms that are lobbying for
a second repatriation tax holiday. Although Senator Kay Hagan [D-NC] introduced the Foreign Earnings
Reinvestment Act on October 6, 2011, WIN America has thus far been unsuccessful in its attempts to get a second
repatriation holiday. See Kocieniewski (2011) and Rauf (2012) for additional discussion of lobbying attempts for
additional repatriation tax holidays.
6
TAX despite calculating and disclosing annually in their effective tax rate reconciliation the tax benefit
associated with current year foreign earnings that are deemed permanently reinvested. Though we
acknowledge the inherent complexity in estimating the unrecorded deferred tax on foreign earnings
designated as PRE (or similarly, the deferred tax on foreign earnings not designated as PRE ) and are
careful to point out that disclosing that the tax on PRE is not practicable is allowed under ASC 740, our
ability to generate reasonable proxies for the undisclosed tax based on three years of ETR reconciliation
data suggests that firms employ an especially lenient definition of “not practicable.” Moreover, our
evidence indicating that PRE and TAX disclosure decisions are a function of factors known to influence
voluntary disclosures (e.g., litigation risk, industry competition) as well as the increased disclosure
incentives around the AJCA suggests managers opportunistically choose when to comply with the
mandatory reporting requirements under ASC 740. Collectively, this evidence of noncompliance is
important as regulators assess the sufficiency of current PRE and TAX disclosures, especially in light of
the numerous implications of PRE and TAX (i.e., PRE and TAX impact repatriations, the location of
foreign operations, investment of foreign funds, etc.).
Second, this study contributes to the growing literature that investigates noncompliance with
mandatory disclosure requirements (e.g., Barth et al. 1997; Li et al. 1997; Gleason and Mills 2002;
Robinson et al. 2011; Rice and Weber 2012; Chen et al. 2013; Peters and Romi 2013; Robinson and
Schmidt 2013). By providing evidence that firms strategically choose not to comply with mandatory
disclosure requirements in a setting involving a long-standing mandatory disclosure requirement where
(a) there is no ambiguity in the requirement or nature of the disclosure or underlying transactions
requiring disclosure, (b) the market should be aware that managers have private information regarding
PRE (because financial statements reflect the tax benefit of permanently reinvested earnings), (c) the
firms are heavily followed by market participants, and (d) the required disclosures either require minimal
effort (as is the case for PRE) or calculations that should be routine for sophisticated firms (as should be
the case for TAX), this study can be viewed as establishing a lower bar for mandatory disclosure
7
noncompliance. In other words, if firms exhibit noncompliance in our setting, firms are even more likely
to exhibit noncompliance in more complex, less transparent settings.
By providing evidence that firms in highly competitive industries are less likely to disclose PRE
and TAX, this study also suggests that (a) the effect of proprietary costs on mandatory disclosure
compliance varies across settings (i.e., with the specific proprietary costs of different required disclosures)
and (b) disclosing earnings permanently reinvested abroad (i.e., earnings “trapped” abroad) has higher
proprietary costs than disclosures in other settings (e.g., detailed compensation disclosures or
environmental liabilities). This is important in light of the mixed evidence regarding the relation between
mandatory disclosure compliance and proprietary costs (e.g., Li et al. (1997), Robinson et al. (2011), and
Chen et al. (2013) find no relation; Robinson and Schmidt (2013) find a relation). Finally, by providing
evidence of increased PRE (but not TAX) disclosure post-AJCA, our study suggests that mandatory
disclosure compliance is not only influenced by the current regulatory environment (e.g., SEC
enforcement actions as in Robinson et al. 2011), but also managers’ anticipation of future regulatory
action that would affect the net cost of compliance. This result suggests that regulators need to consider
not only the immediate impact of a temporary regulation but also how that temporary regulation may
affect future expectations and, thus, distort managerial behavior.
Third, this study develops an estimate of PRE and TAX that is independent of whether firms
actually explicitly disclose such information. Existing research examining the implications of PRE relies
on disclosed PRE. It is possible that the implications (e.g., likelihood that management invests “trapped”
funds in projects that yield low returns, etc.) of PRE may vary based on whether PRE is disclosed in the
financial statements. As such, these estimates have implications for future research.
II. DISCLOSURE REQUIREMENTS AND PRIOR LITERATURE
2.1.
Disclosure Requirements
Since 1972, APB No. 23 (now ASC 740-30-25-17) has permitted firms to avoid recording
deferred taxes on earnings in foreign subsidiaries that the firm designates as permanently reinvested
abroad. To designate earnings as permanently reinvested, the parent company should have (a) ready
8
access to the amount of earnings designated as PRE and (b) evidence of specific plans for reinvestment of
undistributed earnings of the subsidiary to demonstrate that remittance of the earnings to the parent
company is postponed indefinitely. Although regulators allow companies designating earnings as
permanently reinvested (PRE) to avoid recording deferred taxes on PRE, regulators require that firms
taking advantage of this exception disclose annually the amount of PRE and an estimate of the unrecorded
deferred tax liability on the PRE (TAX) or, alternatively, disclose that an estimate of TAX is not
practicable (ASC 740-30-50-2).8
2.2.
Review of Related Literature
2.2.1.
Disclosure Literature
Relative to the decades of research investigating the determinants of voluntary disclosure, firm
compliance with mandatory disclosure requirements has garnered substantially less attention. Indeed,
most studies utilizing financial statement information assume that firms comply with related mandatory
disclosure requirements (e.g., Botosan 1997; Collins et al. 2001; Francis et al. 2008). Existing studies,
however, do provide evidence of noncompliance with required disclosures relating to environmental
liabilities (Barth et al. 1997; Li et al. 1997; Peters and Romi 2013), legal liabilities (Chen et al. 2013), tax
contingencies (Gleason and Mills 2002; Robinson and Schmidt 2013), executive compensation
information (Robinson et al. 2011), and internal control weaknesses (Rice and Weber 2012).9 These
studies generally view firms’ compliance with mandatory disclosure requirements as a response to
regulatory requirements and incentives for voluntary disclosure (e.g., Barth et al. 1997). Consistent with
voluntary disclosure incentives influencing compliance with mandatory disclosure requirements, prior
studies provide evidence that compliance is increasing in (1) the size and estimated materiality of the item
8
ASC 740-30-50-2 does not impose a materiality threshold for disclosure, but simply requires disclosure whenever
a firm takes advantage of the PRE exception. However, SEC rules generally only require public firms to disclose
material information (e.g., Regulation S-X, Rule 4-02 and Rule 4-08(h)(2)). Because our sample selection process
requires that a firm’s SEC filings include some PRE related disclosure to be identified as required to disclose, we
believe that, by construction, our methodology only identifies those firms with material PRE (and TAX).
9
Additional studies identify potential noncompliance but do not investigate further because noncompliance is
beyond the scope of those studies. For example, see Kinney et al. (2004) regarding mandatory audit fee disclosure
and Li et al. (2012) regarding opportunistic management forecasts that seemingly violate disclosure rules.
9
(Barth et al. 1997; Gleason and Mills 2002), (2) regulatory oversight (Barth et al. 1997), (3) access to
capital markets (Barth et al. 1997; Chen et al. 2013), (4) litigation risk and publicity (Li et al. 1997;
Gleason and Mills 2002), (5) the absence of specific managerial incentives for noncompliance (Robinson
et al. 2011), and (6) SEC enforcement action (Robinson et al. 2011).
Despite providing important insight into mandatory disclosure compliance, prior evidence must
be viewed in light of the following limitations. First, it is possible in some of these settings (e.g., loss
contingencies or tax contingencies) that the ambiguous nature of the standards or underlying transactions,
rather than management’s attempt to disclose strategically, is the source of noncompliance. For example,
Barth et al. (1997, p. 36) acknowledge that, if managers determine that (an environmental liability)
disclosure is most appropriate, “the level and content of such disclosures are not well-specified, again
permitting managers considerable discretion in determining what information to disclose.” Second, the
difficulty in estimating the information possessed by management in prior literature (both in terms of
dollar amount and materiality) often limits the ability to conclude management is willfully noncompliant.
For example, Chen et al. (2013, p. 11) note that until the final contingent (legal) liability is determined, it
is possible that non-disclosing managers “may be truly uninformed about the likelihood of case resolution
and/or the materiality of case outcomes” and there is no credible way to distinguish non-disclosing
uninformed managers from strategically non-disclosing informed managers.10 Finally, in settings
examining recently enacted standards (e.g., Robinson et al. 2011; Robinson and Schmidt 2013), it is
possible that management simply is slow to comply with the new standards, due to uncertainty
surrounding the requirements, resource constraints, or lack of regulatory enforcement during the early
period of a standard, making it difficult to generalize evidence to more “steady state” disclosure
requirements.
There are several characteristics of our setting that make it unique relative to prior studies. First,
the disclosure requirements are clear and unambiguous under ASC 740 – firms designating undistributed
10
Likewise, Rice and Weber’s (2012) study of disclosure of internal control weaknesses represents a joint test of the
detection and disclosure of internal control weaknesses. Thus, the authors are not able to distinguish whether
internal control weaknesses (a) were not detected and therefore not disclosed or (b) detected but not disclosed.
10
foreign earnings as PRE are required to disclose annually the cumulative amount of PRE, along with
either the amount of tax that would be due if the earnings were repatriated or a statement that calculating
the tax is not practicable. Moreover, ASC 740 (previously APB No. 23) has been effective for over four
decades so there is little doubt as to what disclosures are required. Second, our estimates of PRE and TAX
are based on the firm’s line item disclosures of material differences between the U.S. statutory tax rate
and the firm’s effective tax rate due to foreign operations. Thus, by construction, the estimated PRE and
TAX amounts are material for our sample firms. Third, because our estimates are based on effective tax
rate reconciliation items disclosed in the tax footnote, we can identify that managers have declared PRE
regardless of whether they choose to comply with the ASC 740 disclosure requirements. Fourth, PRE and
TAX are based on historical, verifiable information. Accordingly, disclosing PRE requires minimal
calculation or managerial effort. Likewise, disclosing TAX requires firms to apply current tax laws and
rates to historical PRE amounts, a process that should (a) not stretch the abilities of the most sophisticated
firms in the U.S. and (b) be conducted routinely to make informed investment, tax, and financial reporting
decisions.11
These characteristics are important for at least two reasons. First, because firms must determine a
specific plan for reinvestment of earnings to qualify for the PRE designation, they have access to detailed
information about PRE.12 Therefore, any non-disclosure of PRE by firms in our sample can be viewed as
strong evidence of noncompliance with the mandatory disclosure requirements under ASC 740. Second,
11
Discussions with an international tax director for a mid-cap publicly traded firm (not in our sample of S&P 500
firms) provide insightful anecdotal evidence of the importance of the TAX calculation for firms with PRE even
when footnote disclosures indicate that it is not practicable to calculate TAX. Specifically, despite disclosing that
TAX is not practicable to calculate in its financial statements (which is allowed under ASC 740), the international
tax director indicated that the firm maintains a comprehensive model that tracks foreign earnings and the costs to
repatriate the earnings, the results of which are presented semi-annually to the firm’s treasurer and board of
directors. Providing additional support for the argument that the TAX calculation is key to the decision to repatriate,
the international tax director added that the company continuously monitors federal tax legislation and searches for
isolated instances where it can take advantage of cost-effective opportunities to repatriate. Separate discussions with
a tax executive for another publicly traded firm (included in our sample) echoed the previous discussion.
Specifically, the executive acknowledged despite disclosing that it is not practicable to calculate TAX, the firm
annually evaluates the cost to repatriate earnings to the U.S.
12
Anecdotal evidence supports this assertion. For example, Genuine Parts Co. received a comment letter from the
SEC related to the firm’s 2011 fiscal year 10-K requesting PRE disclosure. In their response to the SEC’s comment
letter, Genuine Parts acknowledged $291 million in previously undisclosed PRE, as opposed to arguing that they
had not tracked the information.
11
because the market should be aware that managers have made PRE elections for our sample firms (e.g.,
because financial statements reflect the tax benefit of foreign earnings), PRE and TAX disclosures
provide an interesting setting to examine noncompliance. Specifically, if S&P 500 firms choose not to
comply in this setting (where there is no uncertainty regarding a longstanding disclosure requirement, the
market should be aware that managers have private information regarding PRE, the firms are heavily
followed by market participants, and the required disclosures either require minimal effort or calculations
that should be routine for these sophisticated firms), they are unlikely to comply in more complex, less
transparent settings. Hence, this setting can be viewed as establishing a lower bound for mandatory
disclosure noncompliance.
2.2.2.
Permanently Reinvested Earnings Literature
As discussed earlier, several studies examine the consequences of the PRE designation. These
studies provide evidence that the ability to avoid accruing deferred taxes by declaring PRE impacts
decisions regarding the location of foreign operations (Graham et al. 2011), the repatriation of foreign
earnings (Graham et al. 2011; Blouin et al. 2012a), the amount and location of foreign cash (Blouin et al.
2012a; Blouin et al. 2012b), and investments (Bryant-Kutcher et al. 2008; De Waegenaere and Sansing
2008; Hanlon et al. 2012; Edwards et al. 2013). Other studies examine the market valuation of TAX and
find that investors capitalize both disclosed and estimated TAX (e.g., Collins et al. 2001; Oler et al.
2007), with TAX being capitalized to a greater extent when a firm actually discloses TAX in addition to
PRE (e.g., Bauman and Shaw 2008).
In general, these studies rely on the assumption that the disclosed PRE and TAX is truthful and
complete and do not examine whether or to what extent firms comply with the mandatory reporting
requirements of ASC 740. In a contemporaneous paper, Eiler and Kutcher (2012) examine why some
firms disclose TAX while others do not. Consistent with our analyses, they find that TAX disclosure is
decreasing in industry competition, which confirms (using a different sample) that proprietary costs are an
important determinant of TAX mandatory disclosures compliance. In contrast to our study, Eiler and
Kutcher (2012) (a) rely on the assumption that firms disclose PRE, (b) do not investigate compliance with
12
the PRE disclosure, (c) do not derive estimates of PRE or TAX, which allow (i) the quantification of the
amounts of undisclosed earnings trapped abroad and related undisclosed tax liabilities and (ii) important
conclusions regarding the practicability of computing TAX, and (d) do not investigate the effect of the
AJCA on PRE disclosures, which provides insight into how the anticipation of future regulatory action
impacts mandatory disclosure compliance. Accordingly, our study makes key contributions distinct from
Eiler and Kutcher (2012).
III. RESEARCH DESIGN
3.1.
Research Design Overview
We organize the discussion of our research design as follows. Section 3.2 discusses our
procedures for determining which firms are required to disclose PRE. After identifying these firms, we
conduct our disclosure analyses in four stages. In our first stage, discussed in Section 3.3, we estimate the
amount of PRE and TAX. In our second and third stages, discussed in Section 3.4, we investigate the
determinants of PRE and TAX disclosure, respectively. In our fourth stage, discussed in Section 3.5, we
investigate the effects of the AJCA on PRE and TAX disclosure.
3.2.
Identification of Firms Required to Disclose PRE and TAX
We review S&P 500 firms’ SEC 10-K filings from 1997 to 2010 to identify firms required to
disclose PRE during our sample period.13 We first review each firm's income tax disclosures and identify
firm-years that include an explicit disclosure of PRE, TAX, or a statement that estimating TAX is not
practicable. We treat all firms making any of these disclosures as required to disclose PRE. Next, we
review each firm’s effective tax rate (ETR) reconciliation. These disclosures reconcile a firm’s ETR to the
domestic federal statutory rate and, as mandated under ASC 740-10-50-12, list reconciling items that
result in a material difference between a firm’s ETR and the domestic federal tax rate. We collect data on
reconciling line items related to foreign operations. Reconciling items related to foreign tax rate
differentials that reduce the firm’s effective tax rate suggest that the firm designated at least some of its
13
Although our data collection starts in 1997, our final sample period runs from 1999 to 2010 because we require
two prior years of data to estimate our PRE and TAX measures.
13
foreign earnings as permanently reinvested and, thus, is required to disclose PRE.14 Collecting data on
reconciling items serves two purposes. First, it allows us to identify firms that are required to disclose
PRE but fail to do so. Second, it allows us to develop an estimate of PRE and TAX for all firms in our
sample regardless of whether they actually disclose PRE or TAX.
Our data collection process identifies firms that comply with the ASC 740 disclosure
requirements (i.e., firms disclosing PRE, many of which also have a rate reconciliation item) and firms
that fail to comply with the ASC 740 disclosure requirements (e.g., firms that do not disclose PRE but
have a rate reconciliation item). This process yields a sample of 3,416 firm-year observations subject to
the mandatory disclosure requirements of ASC 740.
3.3.
Stage 1: Estimation of PRE and TAX
We use the ETR reconciliation disclosures discussed above to first estimate a firm’s TAX and
then to estimate a firm’s PRE. Specifically, for firms identified as required to disclose PRE, we collect
ETR reconciling items related to current tax rate differentials due to foreign operations
(ReconcilingForeign), earnings from prior years designated as PRE in the current year (ReconcilingNonCurrentPRE),
repatriations (ReconcilingRepat), and reversal of earnings previously designated PRE
14
Donohoe et al. (2012) indicate that firms often put other items not related to foreign tax rate differentials into the
foreign ETR line item. They specifically identify foreign tax credits, repatriations, subpart F income, foreign export
incentives, and audit settlements as being misclassified in their example disclosures. In general, repatriations,
subpart F income, and audit settlements increase the effective tax rate, which would result in us improperly
excluding firms that actually have foreign rate benefits from PRE. Foreign tax credits and foreign export incentives
can decrease the effective tax rate, potentially resulting in improperly including firms in our sample. We note that
the majority of firms disclose foreign tax credits and export benefits as separate line items, or if they did not, they
discuss them in the footnote (which is how Donohoe et al. 2012 identified the misclassified items). We exclude
firm-years if there is ambiguity about whether the ETR item was negative due to PRE or negative due to
misclassifications (e.g., where the firm discussed foreign tax credits or export benefits without a separate ETR
reconciliation line item and without clearly specifying the magnitude of the foreign tax credits or export benefits
relative to the rate benefit). As such, we believe we are able to correctly determine whether a firm is required to
disclose PRE. Adding comfort that our method allows us to correctly identify firms with PRE that fail to comply
with disclosure requirements, we note that 85 percent of our sample non-disclosers do acknowledge in their financial
statements that they have PRE even though they do not disclose the amount. For example, Trane (formerly known as
American Standard) reported a $16.5 million ETR benefit in its December 31, 2002 financial statements, but its PRE
disclosure consisted only of the statement “No provision is made for U.S. income taxes applicable to undistributed
earnings of foreign subsidiaries that are indefinitely reinvested,” which acknowledges the existence of PRE but does
not comply with the disclosure requirements. See Appendix B for another sample disclosure for a firm
acknowledging PRE but failing to disclose the PRE amount.
14
(ReconcilingReversal).15 These reconciling items can be disclosed as a dollar amount or as a percentage. If
the firm discloses reconciling items as percentages, we convert the percentages into dollar amounts by
multiplying the percentages by pre-tax income. We then estimate the accumulated TAX in year t
associated with the accumulated PRE (TAXEstimated) as follows:
TaxEstimated =
∑
∑
+∑
-
-∑
If TAXEstimated is negative, we set it equal to zero. Because TAXEstimated is based on three years of
data, it could be less than zero, for example, if a firm repatriates 10 years’ worth of permanently
reinvested earnings. Based on our methodology, TAXEstimated also equals zero for firms disclosing PRE but
not disclosing material ETR reconciling items related to PRE (for the current and two preceding years).16
Accordingly, TAXEstimated is a conservative measure because it only captures (1) the taxes on the prior three
years of permanently reinvested earnings and (2) ETR reconciling items that were material enough to
warrant disclosure.17
Next, we estimate a firm’s PRE (PREEstimated) using the following formula: PREEstimated =
(TAXEstimated/ (35% - FETR)) * (1 – FETR). In this calculation, we first gross up TAXEstimated by the
difference between the U.S. statutory rate and the firm’s foreign ETR (FETR) to produce an estimate of
Note that only ReconcilingForeign and ReconcilingNon-CurrentPRE are used to determine which firms are required to
disclose PRE because these items indicate that the firm has accumulated PRE at the end of the current year.
Approximately 69.0% of our sample firms are included due to a ReconcilingForeign item, 27% are included due to
disclosing PRE, 2.5% are included due to disclosing that TAX is “not practicable” to calculate, and 1.1% are
included due to disclosing an actual TAX amount. None of our sample firms disclose ReconcilingNon-CurrentPRE
without also disclosing one of the other four items. See Appendix B for details on our data collection process.
16
While TAX is likely to be greater than zero for these firms, the absence of material ETR reconciliation items
related to PRE suggests a level of TAX that is less than the TAX for firms disclosing material ETR reconciliation
items related to PRE. As such, our estimate of TAXEstimated for firms without ETR reconciling items, while
understated, should correctly identify that these firms have lower TAX than other sample firms.
17
The intensive data collection required to estimate PRE and TAX limits our ability to base estimates of PRE and
TAX on all historical footnote data available. Accordingly we use three years of data to estimate PRE and TAX to
ensure a consistent estimation approach across firms.
15
15
the foreign pretax earnings classified as PRE. Since PRE is an after-tax number, we then multiply the
estimated foreign pretax earnings by 1 minus FETR to estimate the firm’s PRE.18
3.4.
Empirical Design
3.4.1.
Stage 2: Determinants of PRE Disclosure
After identifying firms required to disclose PRE and developing estimates of firms' PRE and
TAX, we use the following logit model to investigate the determinants of PRE disclosure:
Disclosureit =
β0 + β1PREEstimated/PIit + β2TAXEstimated/PIit + β3BMit + β4Debtit +
β5Equityit + β6Litigationit + β7Lossit + β8HHIit +
(1)
β9PROA_Domesticit + β10PROA_Foreignit + β11NAnalystit +
β12Instit + β13LnSalesit + εit
The dependent variable, Disclosure, is an indicator variable equal to one if a firm discloses the
amount of its PRE and zero otherwise.
We include PREEstimated/PI and TAXEstimated/PI to assess whether the magnitudes of PRE and TAX
influence mandatory disclosure compliance. PREEstimated/PI equals the ratio of estimated PRE (PREEstimated)
to the three-year sum of pre-tax income. TAXEstimated/PI equals the ratio of estimated TAX (TAXEstimated) to
the three-year sum of pre-tax income. Deflating by the sum of pre-tax income measured over the same
three years that we measure PREEstimated and TAXEstimated captures the materiality of PRE and TAX relative
to the firm’s profits. Since by construction, all sample firms are required to disclose PRE and TAX, there
is no reason pursuant to ASC 740 to expect that the materiality of PRE or TAX affects the required
disclosure of PRE. However, prior research (e.g., Barth et al. 1997; Gleason and Mills 2002) finds in
certain circumstances that mandatory disclosure compliance increases with the underlying materiality of
the disclosure item, suggesting that firms with larger PREEstimated/PI and TAXEstimated/PI may be more likely
to disclose PRE. In contrast, it is possible that PREEstimated/PI and TAXEstimated/PI may proxy for political
costs (Wagenhofer 1990; Healy and Palepu 2001; Dhaliwal et al. 2004; Frischmann et al. 2008), which
See Appendix A for details on our calculation of FETR. If FETR is greater than 35%, we set PREEstimated equal to
zero (i.e., the U.S. rate exceeds the foreign rate, so no tax would be due on repatriation).
18
16
might lead to less disclosure if firms with large PRE or TAX are viewed as not paying their “fair share” of
taxes. In this setting, political costs might include costs associated with public scrutiny, IRS audits,
additional taxes due upon audit, or the imposition of new taxes.19 Accordingly, we do not make a
directional prediction for the coefficients on PREEstimated/PI or TAXEstimated/PI in our PRE model.
BM equals a firm’s book-to-market ratio and proxies for growth opportunities as well as
information asymmetry between firms and investors (Verrecchia 1990; Bamber and Cheon 1998; Atiase
et al. 2005; Rogers and Stocken 2005; Robinson and Schmidt 2013). Because BM proxies for multiple
constructs, we do not make a directional prediction. We set Debt and Equity equal to one if the firm
issued debt or equity, respectively, in year t, and zero otherwise. We expect a positive coefficient on both
indicator variables because firms tend to disclose more information when raising capital (Verrecchia and
Weber 2006; Heitzman et al. 2010). We set Litigation equal to one if the firm is in a litigious industry
based on the Francis et al. (1994) industry classifications, and zero otherwise. We expect a positive
coefficient on Litigation because prior literature generally finds that firms disclose more information to
prevent shareholder lawsuits (e.g., Skinner 1994). We include an indicator for loss firm-years (Loss).
Verrecchia and Weber (2006) argue that loss firms may be more likely to withhold information to avoid
incurring proprietary costs in addition to costs associated with their poor current year performance while
Baginski et al. (2004) argue that loss firms may disclose more information to explain their performance.
As such, we do not make a directional prediction for Loss.
We include the ranked Herfindahl index (HHI) as our measure of proprietary costs (Bamber and
Cheon 1998; Verrecchia and Weber 2006). We define proprietary costs as the costs of disclosing sensitive
information to competitors, investors, and creditors (Verrecchia 1983). Higher values of HHI indicate that
the firm operates in a more concentrated (less competitive) industry. We expect a positive association
between Disclosure and HHI because firms in more concentrated, less competitive industries have less
19
Although lack of access to confidential IRS data makes it difficult to directly link PRE or TAX disclosures to
political costs, anecdotal evidence does suggest a link. For example, Microsoft and Hewlett-Packard, both PRE
disclosers since the start of our sample, have been subject to a Congressional investigation focused on PRE and
other offshoring issues (Levin and Coburn 2012; Dixon 2012).
17
fear of competition and a lower cost associated with disclosing proprietary information (in this setting, the
amount and duration of earnings invested abroad and the related tax costs of repatriating such
investment). Consistent with prior studies (Verrecchia and Weber 2006; Heitzman et al. 2010), we
include proxies for profitability to control for any impact performance has on the disclosure decision.
Because PRE and TAX relate directly to foreign profits, we control for profitability by including separate
measures of domestic (PROA_Domestic) and foreign (PROA_Foreign) profitability. We make no
directional prediction for either measure. We include the number of analysts (NAnalyst) as a proxy for
information demand. We expect a positive association between Disclosure and NAnalyst because analyst
following is positively associated with information demand, which should increase disclosure (Francis et
al. 2008; Zechman 2010). We include Inst, which represents the percentage of shares owned by
institutions. We expect a negative association between Disclosure and Inst because higher institutional
ownership represents lower information asymmetry and therefore, less need for disclosure (Bushee et al.
2003). Finally, we include the natural log of sales (LnSales) to control for size. We make no directional
prediction for the coefficient on LnSales because firm size proxies for a number of factors.
3.4.1.
Stage 3: Determinants of TAX Disclosure
To investigate the determinants of TAX disclosure, we define Disclosure equal to one if the firm
discloses the actual TAX amount and zero if the firm does not disclose TAX or if the firm discloses that
TAX is not practicable to determine. Because TAX disclosure is less common when PRE is not disclosed,
we estimate our TAX model on the subsample of firms that actually disclose PRE.20 Unlike PRE
disclosure which is mandatory for firms in our sample, we anticipate that managers are likely to view
TAX as a voluntary disclosure because ASC 740 allows managers to disclose that TAX is not practicable
to determine rather than disclosing the actual amount of TAX (refer to footnote 11 for anecdotal evidence
corroborating this view). Given that most control variables relate to disclosures that are more voluntary in
nature (e.g., Litigation, HHI, Debt, Equity, etc.), most predictions are the same when considering TAX
20
All results are robust to estimating the TAX regression in the full sample of firms, including those firms that do
not disclose PRE.
18
disclosure as they are when considering PRE disclosure. One notable exception relates to the expected
coefficient on TAXEstimated/PI. Since firms are required to disclose PRE, it is not clear how the magnitude
of PRE (PREEstimated/PI) or the underlying TAX on PRE (TAXEstimated/PI) would impact PRE disclosure.
Given that disclosure of TAX is more voluntary in nature and TAXEstimated/PI represents the cash taxes and
financial reporting expenses associated with the repatriation of PRE, we anticipate a negative association
between TAX disclosure and TAXEstimated/PI. This prediction is consistent with prior studies that find that
managers are less likely to voluntarily disclose information that may adversely affect firm value
(Robinson et al. 2011) and that TAX disclosure adversely affects firm value for firms that disclose PRE
(Bauman and Shaw 2008).
3.5. Stage 4: Response to Disclosure Incentives around the AJCA
As described earlier in the paper, the AJCA allowed firms to repatriate foreign earnings during
2004 and 2005 at a reduced tax rate under certain conditions. However, firms must have disclosed the
amount of their PRE in years leading up to the AJCA (i.e., prior to June 30, 2003) to take full advantage
of this provision. By limiting the tax benefits of the AJCA repatriation holiday to firms with adequate
PRE disclosure, the AJCA likely created additional incentives to disclose PRE (but not necessarily TAX)
for firms anticipating future repatriation holidays similar to the AJCA. To assess the impact of the AJCA
on mandatory compliance with PRE and TAX disclosures, we add two variables, AJCA and Post2005 to
the original regression:
β0 + β1AJCAt + β2Post2005t + β3PREEstimated/PIit + β4
Disclosureit =
TAXEstimated/PIit + β5BMit + β6Debtit + β7Equityit + β8Litigationit +
(2)
β9Lossit + β10HHIit + β11PROA_Domesticit + β12PROA_Foreign +
β13Analystit + β14Instit + β15LnSalesit + εit
To identify the initial impact of the AJCA, we include an indicator variable, AJCA, equal to one
for observations in 2004 and 2005, and zero otherwise. In the years immediately following the AJCA,
there was discussion of another potential repatriation tax holiday. If anticipation of another tax holiday
increased PRE disclosure, we anticipate a positive coefficient on AJCA when PRE disclosure is the
19
dependent variable. Because firms were not required to disclose TAX to benefit from the AJCA
repatriation tax holiday, we make no prediction regarding the association between AJCA and TAX
disclosure. We also include Post2005, which equals one for years after 2005 and zero otherwise, to
determine if any improvement in PRE related disclosure attributable to the AJCA persists in future years.
If the AJCA positively impacts PRE disclosure and that effect is persistent, we expect a positive
coefficient on Post2005 when PRE disclosure is the dependent variable. We recognize that various other
factors, such as the enactment of FIN 48 and the increased media and political scrutiny on PRE and
foreign cash balances, occurred during the Post2005 period and may improve PRE and TAX reporting
independently of the AJCA. As such, it is difficult to attribute any long-run response solely to anticipation
of a future tax holiday. Predictions on all other variables are unchanged.
IV. SAMPLE SELECTION AND DESCRIPTIVE STATISTICS
4.1.
Sample Selection
Table 1 provides the details of our sample selection process. We limit our sample to firms
appearing in the S&P 500 (per CRSP) at any time between 1999 and 2010 (850 firms). Focusing on S&P
500 firms results in a manageable sample for hand-collection of data while ensuring that analyses utilize
an economically significant component of the population of firms (e.g., Bauman and Shaw 2008; Bamber
et al. 2010). We eliminate firms without Compustat or 10-K data necessary for our analyses, firms not
subject to corporate tax (e.g., REITs), foreign firms, and subsidiaries of other firms. This results in an
initial sample of 7,668 firm-year observations.
For each firm-year, we collect (if disclosed) a firm’s (a) cumulative amount of disclosed PRE
(PREReported), (b) cumulative amount of disclosed TAX (TAXReported), (c) current year ETR benefit from
declaring current earnings permanently reinvested (
), (d) current year tax expense or
benefit associated with repatriations (
), (e) current year tax expense associated with
removing the PRE designation from prior year foreign earnings (
year tax benefit associated with converting prior year foreign earnings to PRE
20
), and (f) current
(
). We also record when a firm does not disclose a specific TAX amount but
instead discloses that TAX is not practicable. See Appendix B for examples of a typical and a
comprehensive footnote disclosure.
From the hand-collected sample of 7,668 firms, we then impose additional data requirements
(e.g., ability to calculate a Foreign ETR) and limit our sample to firms required to disclose PRE, as
discussed in Section 3.2, resulting in an initial sample of 3,416 firm-years (480 firms). After requiring
data necessary in our regression analyses (e.g., analysts and institutional ownership data), our sample
consists of 3,097 firm-year observations.
4.2.
Descriptive Statistics
Table 2 presents descriptive statistics for firms in our sample partitioned by year. Panel A focuses
on reported and estimated PRE and further partitions the sample by PRE disclosure status. The first three
rows of data indicate that 462 firm-years (142 unique firms) of the aggregate 3,416 firm-years (480
unique firms) fail to disclose PRE when required. The next three rows of data indicate that 13.5% of our
sample fails to disclose PRE with between 14.0% and 18.2% failing to disclose PRE prior to the AJCA
and between 11.7% and 12.9% failing to disclose PRE following the enactment of the AJCA. Although
caution should be used when interpreting descriptive data without controls for other determinants of
disclosure choice, these data provide preliminary evidence that the period around the debate (2003) and
passage (2004) of the AJCA is associated with a larger percentage of firms disclosing PRE. We conduct a
multivariate analysis (discussed in Section 5.3) examining whether the AJCA is associated with a distinct
change in PRE disclosure after controlling for other factors that may influence the disclosure choice.
The data in Panel A also suggest a general increase in the magnitude of PRE (both PREEstimated
and PREReported) over time for firms disclosing PRE. Specifically, PREReported (PREEstimated) increased from
$190.2 billion ($126.2 billion) in 1999 to over $1,024.0 billion ($577.5 billion) in 2010. A notable
exception to this general trend occurs in 2005 when estimated and reported PRE declined as firms
21
repatriated foreign earning during the AJCA repatriation tax holiday.21 For non-disclosers, estimated PRE
is relatively volatile prior to the enactment of the AJCA in 2004, starting at $9.9 billion in 1999,
increasing to $33.7 billion in 2000, and then decreasing to $12.6 billion by 2003. However, estimated
PRE generally increases following the enactment of the AJCA, starting at $17.9 billion in 2004 and
increasing to $84.2 billion by 2010.22 These data suggest that the aggregate amount of undisclosed PRE
(i.e., undisclosed earnings that may be effectively “trapped overseas”) has risen dramatically during the
sample period, consistent with concerns that the implications of PRE are not transparent to investors. In
terms of the amount of undisclosed PRE, it is important to note that PREEstimated represents a lower bound
for actual PRE. Specifically, focusing on the ratio of PREReported to PREEstimated for PRE disclosers,
PREReported exceeds PREEstimated in each year and, on average, PREReported exceeds PREEstimated by over 56%
during our sample period. Accordingly, we view PREEstimated as a conservative estimate of undisclosed
PRE.23
Table 2, Panel B presents reported and estimated TAX by year and further partitions the sample
by TAX disclosure status. The first three rows of data indicate that 2,636 firm-years (414 unique firms) of
the aggregate 3,416 firm-years (480 unique firms) either do not disclose TAX or disclose that TAX is not
practicable to calculate. The next three rows of data indicate that approximately 77.2% of our sample fails
to disclose TAX. Unlike the general increase of PRE disclosure over time, there is no consistent trend in
TAX disclosure. Instead, the percentage of firms failing to disclose TAX first increases from 72.9% in
1999 to 79.2% of firms in 2003, declines to 73.8% in 2004, and then increases again from 76.5% in 2005
to 81.2% in 2010. This trend runs counter to the general increase in firms disclosing PRE over the sample
21
The AJCA created IRC Section 965 allowing firms to receive an 85 percent dividends received deduction on cash
dividends from controlled foreign corporations. However, this dividend is limited to the greater of $500 million or
the amount shown as PRE prior to June 30, 2003. As such, firms reporting PRE were much more likely to derive a
substantial benefit from Section 965 relative to firms with undisclosed PRE. Section 965 was commonly referred to
as the "dividend tax holiday."
22
We note that non-disclosure of PRE affects even the largest, most well-known firms. For example, Dell, GE, and
Pepsi changed from non-disclosers in one year (2001) to disclosing over $25 billion (combined) in PRE the next
year (2002). The firms’ ETR line items were not substantially different in the initial year of disclosure from prior
years, indicating that the majority of the PRE disclosed in 2002 also existed in 2001.
23
In untabulated tests, we find that for firms disclosing PRE, PREReported exceeds PREEstimated over 85% of the time,
again confirming that our PRE estimates are generally conservative.
22
period presented in Panel A. Unlike PRE, the decreased propensity to disclose TAX in this univariate
analysis is consistent with the AJCA providing no additional incentives to disclose TAX. We conduct a
multivariate analysis in Section 5.3 to more fully investigate the relationship between the AJCA and TAX
disclosure.
Similar to the increase in PRE across the sample period, the data in Panel B indicates that the
magnitude of TAX (both TAXReported and TAXEstimated) generally increases over time. Specifically,
TAXReported (TAXEstimated) for disclosers increased from $7.55 billion ($3.07 billion) in 1999 to $49.48
billion ($26.88 billion) in 2010. For non-disclosers, TAXEstimated increased from $9.57 billion in 1999 to
$82.23 billion in 2010, suggesting that the aggregate amount of undisclosed TAX (i.e., undisclosed and
unrecorded deferred tax liability on earnings that may be effectively “trapped overseas”) has risen
dramatically during the sample period. Given that TAX conveys the cash and financial reporting
ramifications associated with potential repatriation of PRE, the decreased rate of TAX disclosure and the
increased magnitude of undisclosed TAX are troubling. The fact that TAXReported exceeds TAXEstimated, on
average, by over 87% for our sample of TAX disclosers suggests that TAXEstimated represents a
conservative lower bound for undisclosed TAX and magnifies any concerns over undisclosed TAX.24
Table 3 presents univariate statistics for our regression samples. All statistical differences
discussed are similar based on mean and median comparisons, unless otherwise noted. In Panel A, we
partition the PRE regression sample by PRE disclosure status. Data suggest that the average
PREEstimated/PI is not statistically different for disclosers and non-disclosers (although the median value
PREEstimated/PI is statistically larger for disclosers). In contrast, the average TAXEstimated/PI is
significantly larger for disclosers than non-disclosers (although the median value for TAXEstimated/PI is
not statistically different for disclosers and non-disclosers). In combination, these univariate data suggest
that the concern over the materiality of PRE or TAX likely influences PRE disclosure, but given the
mixed univariate evidence, we withhold further conclusions for multivariate analyses that include controls
In untabulated tests, we find that for firms disclosing TAX, TAXReported exceeds TAXEstimated approximately 71% of
the time, confirming that our TAX estimates are generally conservative.
24
23
for other likely determinants of PRE disclosure. Consistent with expectations, PRE disclosers operate in a
more litigious industry (as measured by Litigation), face less competition (as measured by HHI, at the
mean value), and have less institutional ownership (as measured by Inst). PRE disclosers are also larger
on average (as measured by LnSales).
In Table 3, Panel B we present univariate statistics for the TAX regression sample partitioned by
TAX disclosure status. In contrast to the data in Panel A, TAX disclosers have less material levels of
PRE (as measured by PREEstimated/PI, at the mean value) and TAX (as measured by TAXEstimated/PI).
Collectively, the results in Panels A and B provide some evidence that firms with material levels of TAX
or PRE comply with the minimum disclosure requirements by being more likely to disclose PRE, but fail
to disclose TAX (e.g., by strategically disclosing the calculation of TAX is not practicable). The
disclosure of TAX is important because the TAX associated with PRE directly impacts both the
repatriation decision and the tax and financial reporting effects of repatriation. Consistent with
expectations, TAX non-disclosers are also more likely to operate in more competitive industries (as
measured by HHI). Because TAX disclosures potentially provide information about subsidiaries in low
tax jurisdictions, these data suggest that firms facing higher proprietary costs are less likely to disclose
TAX. Interestingly, disclosers are also more profitable (as measured by PROA_Domestic and
PROA_Foreign, at the mean value), smaller (as measured by LnSales), and have less institutional
ownership (as measured by Inst).
Table 4 presents correlations between the reported and estimated PRE for firms disclosing PRE
and the correlations between reported and estimated TAX for those firms disclosing TAX. We report
Pearson correlations above the diagonal and Spearman correlations below the diagonal. We limit our
discussion to Pearson correlations as inferences are similar using Spearman correlations. For those firms
disclosing PRE, the correlation between PREReported and PREEstimated is 0.57 (p-value<0.0001), indicating
that our estimates of PRE are quite reasonable. Likewise, for these firms the correlation between
PREReported/PI and PREEstimated/PI is 0.27 (p-value<0.0001), indicating that our regression variable is also a
reasonable representation of the actual scaled PRE amount. For those firms disclosing TAX, the
24
correlation between TAXReported and TAXEstimated is 0.91 (p-value<0.0001), indicating high quality estimates
of TAX. The correlation between TAXReported/PI and TAXEstimated/PI is 0.36 (p-value<0.0001), indicating
that our regression variable is also a reasonable representation of the actual scaled TAX amount.
In sum, descriptive data suggest that our estimates for PRE and TAX are sufficient to (a) provide
a lower bound of undisclosed PRE and TAX, (b) evaluate cross-sectionally how the magnitude of PRE
and TAX influences disclosure, and (c) assess the practicability of estimating TAX. With respect to
assessing the practicability of TAX, our ability to generate reasonable proxies for the undisclosed tax
based on three years of ETR reconciliation data suggests that firms employ an especially lenient
definition of “not practicable.”
V. MULTIVARIATE RESULTS
5.1.
Determinants of PRE Disclosure
Table 5 presents the results from estimating equation (1) with Disclosure equal to one for firm-
years in which a firm complies with the requirements of ASC 740 and discloses PRE, and zero otherwise.
We find an insignificant coefficient on PREEstimated/PI (p-value = 0.3860) and positive and significant
coefficient on TAXEstimated/PI (p-value = 0.0600). These results suggest that concern over the materiality of
the unrecorded tax liability associated with PRE motivates PRE disclosure more so than the materiality of
PRE itself. To assess the impact of TAX on the probability of PRE disclosure, we compute the marginal
effects (untabulated) and find that a one standard deviation increase in TAXEstimated/PI increases the
probability of disclosure by 2.6%.25
The remaining variables included in equation (1) are consistent with expectations when
significant. The coefficient on Litigation is positive and significant (p-value = 0.0025), suggesting that
firms are more likely to comply with ASC 740 and disclose PRE when the firm operates in a more in a
litigious industry (i.e., when failing to comply with disclosure requirements is potentially more costly).
The coefficient on HHI is also positive and significant (p-value = 0.0515), indicating that firms in less
competitive industries are more likely to disclose PRE. Because disclosing PRE can reveal proprietary
25
2.6% = 0.3655 (marginal effect) * 0.0707 (standard deviation of TAXEstimated/PI within the regression sample).
25
information about the foreign countries in which the firm operates, the tax savings attributable to those
operations, and expectations of future investment in those countries, this result is consistent with
proprietary costs reducing disclosure. Finally, we also find a positive and significant coefficient on
LnSales (p-value = 0.0860), suggesting that larger firms are more likely to comply with the PRE
disclosure requirements under ASC 740.
5.2.
Determinants of TAX Disclosure
Table 6 presents the results from estimating equation (1) in the subsample of firms that disclose
PRE with Disclosure equal to one for firm-years in which a firm discloses the TAX due upon repatriation
of PRE, and zero otherwise. We find an insignificant coefficient on PREEstimated/PI (p-value = 0.3760) and
a negative and significant coefficient on TAXEstimated/PI (p-value = 0.0245). Considering the results
presented in Tables 5 and 6 collectively, the materiality of PRE does not appear to increase compliance in
either the PRE or TAX disclosure decisions. The magnitude of the TAX is important though, with firms
with more material TAX being more likely to disclose PRE but less likely to disclose the actual TAX
balance. These results suggest that firms with larger, more material TAX are more likely to comply with
the minimum disclosure requirements under ASC 740 (i.e., disclose PRE) but are less willing to disclose
the information that allows investors to better understand the extent of the cash and financial reporting
ramifications if that PRE is ultimately repatriated to the U.S. (i.e., disclose TAX).
The remaining variables included in equation (1) are consistent with expectations when
significant. We find a positive and significant coefficient on HHI (p-value = 0.0210) indicating that firms
in less competitive industries are more likely to disclose TAX. Because disclosing TAX reveals the
magnitude of the tax benefits associated with operating in one or more low tax jurisdictions, this result is
consistent with proprietary costs reducing disclosure in this setting. In light of prior mixed evidence
regarding the relation between mandatory disclosure compliance and proprietary costs (e.g., Li et al.
(1997), Robinson et al. (2011), and Chen et al. (2013) find no relation; Robinson and Schmidt (2013) find
a relation), our evidence is consistent with (a) the effect of proprietary costs on mandatory disclosure
compliance varying across settings (i.e., with the specific proprietary costs of different required
26
disclosures) and (b) disclosure of earnings permanently reinvested abroad and the related unrecorded tax
liability on repatriation having higher proprietary costs than disclosures in other settings (e.g., detailed
compensation disclosures or environmental liabilities).
We find a negative and significant coefficient on Inst (p-value = 0.0885), consistent with
decreased demand for additional disclosures when information asymmetry is low. Although we made no
predictions with respect to PROA_Foreign or LnSales, we find a positive and significant coefficient on
PROA_Foreign (p-value = 0.0370) and a negative and significant coefficient on LnSales (p-value =
0.0710). This latter result is interesting because, when considered with the earlier PRE results, it
demonstrates that larger firms are more likely to comply with the minimum disclosure requirements (i.e.,
disclose PRE) but less likely to provide supplemental information (i.e., disclose TAX).
5.3.
The Impact of the AJCA on PRE and TAX Disclosure
Table 7 presents the results from estimating equation (2), which is intended to determine if the
AJCA had a material impact on PRE and TAX disclosure decisions. In Column 1 (Column 2), we present
the results from estimating equation (2) with Disclosure equal to PRE disclosure (TAX disclosure). The
key variables of interest in these analyses are AJCA and Post2005. Recall that the amount of foreign
earnings a firm was allowed to repatriate at a reduced rate under the AJCA was limited to the greater of
$500 million or the amount of PRE disclosed in the firm's financial statements. As such, the AJCA
provided an incentive for firms to disclose PRE but did not provide a similar incentive for a firm to
disclose TAX. Consistent with the changing incentives around the AJCA, the coefficient on AJCA is
positive and significant when PRE disclosure is the dependent variable (p-value = 0.0395) but
insignificant when TAX disclosure is the dependent variable (p-value = 0.2660). These results are
consistent with firms increasing PRE disclosure in anticipation of another tax holiday in the future that,
like the AJCA, may be based on a firm's disclosed PRE. Marginal effects indicate that firms are 3.3%
more likely to disclose PRE during the AJCA period relative to the pre-AJCA period. Interestingly, the
coefficient on Post2005 is positive but not quite significant when PRE disclosure is the dependent
variable (p-value = 0.1015) and the coefficient on Post2005 remains insignificant when TAX disclosure is
27
the dependent variable.26 This result suggests that any improvement in disclosure in response to the AJCA
was most concentrated around the AJCA itself. 27 Collectively, these results are interesting because they
demonstrate the impact of a tax law change on financial reporting behavior, and more specifically,
mandatory disclosure compliance. All other results presented in Table 7 are similar to those reported in
Tables 5 and 6.
VI. CONCLUSION
Regulators and financial commentators have expressed concerns that the implications of PRE are
not transparent to investors as a result of missing or insufficient financial statement disclosures. To shed
light on these concerns, we use a sample of S&P 500 firms from 1999 to 2010 to investigate firms’
noncompliance with the mandatory disclosure requirements for PRE (and its related TAX) and the factors
associated with any noncompliance. Our analysis provides several interesting conclusions regarding
firms’ choices to comply with the mandatory disclosure requirements of ASC 740.
First, we find that a nontrivial percentage of sample firms (11.7% to 18.2% annually) do not
disclose PRE despite electing to designate a substantial amount of their earnings as PRE. We also find
that annually 72.9% to 81.2% of firms either disclose that TAX is not practicable to calculate or provide
no mention of TAX at all. The large percentage of firms disclosing PRE but not disclosing TAX is
interesting given that (a) many of these firms calculate and disclose the tax benefit associated with current
year foreign earnings that are deemed permanently reinvested annually in their effective tax rate
reconciliation and (b) we are able to derive reasonable estimates of TAX from the effective tax rate
reconciliations. Annually, we conservatively estimate that the aggregate estimated undisclosed PRE
26
We re-estimate the analysis in Table 7 for the subsample of firms most likely to benefit from a future repatriation
tax holiday similar to the AJCA (i.e., those firms that repatriated at any point in our sample period). We find that the
coefficients on both AJCA and Post2005 are positive and highly significant (p-values<0.0050) when PRE disclosure
is the dependent variable. All other inferences hold. Further, marginal effects indicate that these firms are
approximately 7.5% more likely to disclose PRE in both the AJCA and Post2005 periods relative to the pre-AJCA
period. These results provide additional evidence that the expected benefits of disclosure play an important role in
the disclosure decision.
27
We note in the descriptive analyses in Table 2 that the percentage of PRE non-disclosers increased in 2000 and
then began to decline in 2001. To ensure that the coefficients for AJCA and Post2005 capture a time effect unique to
the passage of the AJCA (as opposed to a general time trend unrelated to the AJCA), we re-estimate the analyses in
Table 7 after excluding 1999 and 2000 observations. All inferences hold.
28
(TAX) ranges from a low of $9.9 ($9.6) billion to a high of $84.2 ($82.2) billion. Collectively, these
results suggest that (a) a significant portion of firms fail to comply with the mandatory disclosure
requirements for PRE, (b) noncompliance spans a long window of time and is an issue among even the
largest, most sophisticated firms in the U.S. capital markets (i.e., S&P 500 firms), and (c) the amounts of
undisclosed PRE and TAX are substantial in magnitude.
Second, we model firms’ choice to comply with the mandatory PRE disclosure requirements as a
function of the magnitude of a firm’s estimated PRE and estimated TAX as well as other variables
previously shown to influence disclosure decisions. Our results suggest that concern over the magnitude
of the unrecorded TAX (i.e., the unrecorded liability associated with PRE) motivates PRE disclosure
more so than the magnitude of the PRE itself. We also find that firms operating in more litigious or less
competitive industries are more likely to disclose PRE, suggesting that legal concerns (e.g., Skinner 1994)
and proprietary costs (e.g., Verrecchia 1983) are significant determinants of mandatory PRE disclosure
compliance. Finally, we find that larger firms are more likely to disclose PRE. Collectively, these results
suggest that firms strategically choose not to comply with the mandatory PRE requirements.
Third, we estimate the determinants of firms’ choice to disclose TAX. We find that firms are
more likely to disclose TAX if they operate in a less competitive industry (consistent with lower
proprietary costs, e.g., Verrecchia 1983) or if they have lower institutional ownership (consistent with
increased demand for additional disclosures when information asymmetry is high). We also find that
TAX disclosure increases with foreign profitability and decreases with firm size. Combined with the
evidence that PRE disclosure increases with firm size, this evidence suggests that larger firms are more
likely to comply with the minimum disclosure requirements (i.e., disclose PRE) but less likely to provide
supplemental information (i.e., disclose TAX). Interestingly, we find evidence that firms choose to
disclose that estimating TAX is not practicable or provide no mention of TAX when the financial
statement impact of the TAX is larger. Consistent with Robinson et al. (2011), this evidence suggests that
firms are less likely to comply with mandatory disclosure requirements if such disclosure may reflect
negatively on the firm (e.g., the firm has larger unrecorded tax liabilities associated with PRE).
29
Finally, we investigate how firms respond to the increased disclosure incentives around the
American Jobs Creation Act of 2004, which allowed firms to repatriate foreign earnings at a substantially
discounted tax rate under certain conditions. Consistent with the AJCA creating additional incentives to
disclose PRE, we find a distinct increase in PRE disclosure in the years immediately following the AJCA.
This study makes three primary contributions. First, we address regulators’ concerns that the
implications of PRE are not transparent to investors due to noncompliance with the disclosure
requirements mandated by ASC 740. We provide evidence of significant noncompliance with PRE
disclosure requirements and particularly lenient application of the TAX disclosure requirements,
suggesting that regulators’ concerns are justified. Specifically, we find that a significant percentage of
firms fail to comply with the GAAP reporting requirements for PRE and, for those firms disclosing PRE,
the vast majority choose either to disclose that TAX is not practicable to calculate or provide no mention
of TAX. Though we acknowledge the inherent complexity in estimating the unrecorded deferred tax on
foreign earnings designated as PRE (or similarly, the deferred tax on foreign earnings not designated as
PRE ) and are careful to point out that the disclosure that the tax on PRE is not practicable is allowed
under ASC 740, our ability to generate reasonable proxies for the undisclosed tax based on three years of
ETR reconciliation data suggests that firms employ an especially lenient definition of “not practicable.”
Moreover, our evidence indicating that PRE and TAX disclosure decisions are a function of factors
known to influence voluntary disclosures (e.g., litigation risk, industry competition) as well as the
increased disclosure incentives around the AJCA suggests managers opportunistically choose when to
comply with the mandatory reporting requirements under ASC 740. Collectively, this evidence of
noncompliance should be important to regulators as they assess the sufficiency of current PRE and TAX
disclosures.
Second, this study contributes to the growing literature that investigates noncompliance with
mandatory disclosure requirements. By providing evidence that firms strategically choose not to comply
with mandatory disclosure requirements in a setting involving a long-standing mandatory disclosure
requirement where (a) there is no ambiguity in the requirement or nature of the disclosure or underlying
30
transactions requiring disclosure, (b) the market should be aware that managers have private information
regarding PRE (because financial statements reflect the tax benefit of permanently reinvested earnings),
(c) the firms are heavily followed by market participants, and (d) the required disclosures either require
minimal effort or calculations that should be routine for sophisticated firms, this study can be viewed as
establishing a lower bar for mandatory disclosure noncompliance. In other words, if firms exhibit
noncompliance in our setting, firms are even more likely to exhibit noncompliance in more complex, less
transparent settings. Our evidence that firms in highly competitive industries are less likely to disclose
PRE and TAX is also particularly important in light of prior mixed evidence regarding the relation
between mandatory disclosure compliance and proprietary costs. Our findings suggests that (a) the effect
of proprietary costs on mandatory disclosure compliance varies with the specific proprietary costs of
different required disclosures and (b) disclosure of earnings permanently reinvested abroad has higher
proprietary costs than disclosures in other settings (e.g., detailed compensation disclosures or
environmental liabilities). Finally, by providing evidence of increased PRE (but not TAX) disclosure in
the years immediately following the AJCA, our study suggests that mandatory disclosure compliance is
not only influenced by the current regulatory environment (e.g., SEC enforcement actions as in Robinson
et al. 2011), but also manager’s anticipation of future regulatory action that would affect the net cost of
compliance. This result suggests that regulators need to consider not only the immediate impact of a
temporary regulation but also how that temporary regulation may affect future expectations and, thus,
distort managerial behavior.
Third, this study develops an estimate of PRE and TAX that is independent of whether firms
actually explicitly disclose such information. Existing research examining the implications of PRE relies
on disclosed PRE. It is possible that the implications (e.g., likelihood that management uses the “trapped”
funds inefficiently, etc.) of PRE may vary based on whether PRE is disclosed in the financial statements.
As such, these estimates have implications for future research.
31
Appendix A
Variable Definitions
Variable
Disclosureit
(PRE)
Definition
an indicator variable equal to one if firm i discloses the amount of its PRE in
year t, and zero otherwise.
Disclosureit
(TAX)
an indicator variable equal to one if firm i discloses the amount of its TAX
in year t, and zero otherwise. Note if firm i discloses in year t that TAX is
"not practicable to determine" (or makes a similar statement), Disclosureit
equals zero.
PREReportedit
equals firm i's cumulative PRE balance, if disclosed, as reported in its year t
SEC filings.
TAXReportedit
equals firm i's cumulative TAX balance, if disclosed, as reported in its year t
SEC filings.
TAXEstimatedit
equals firm i's cumulative TAX balance from years t-2 to year t.
Algebraically, TAXEstimated for firm i in year t equals
∑
+∑
∑
-∑
, where
ReconcilingForeign equals the current year ETR benefit from designating
current year foreign earnings as PRE, ReconcilingNon-CurrentPRE equals the
current year ETR benefit from designating non-current foreign earnings as
PRE, ReconcilingRepat equals the ETR effect resulting from repatriating
foreign earnings, and ReconcilingReversal equals the current year ETR increase
resulting from removing the PRE designation from prior year earnings
originally designated PRE.
PREEstimatedit
equals firm i’s estimated PRE at the end of year t, calculated as (TAXEstimated/
(35% - FETR) ) * (1 - FETR). If FETR > 35%, PREEstimatedit is set equal to
zero.
FETRit
equals firm i’s foreign effective tax rate in year t. Following Bauman and
Shaw (2008), FETRit equals the ratio of the sum of current foreign taxes
from year t-2 to year t (txfo-txdfo) to the sum of pre-tax foreign income
(pifo) from year t-2 to year t. FETRit is set to 0 if the sum of current foreign
taxes from year t-2 to year t is negative. FETRit is set equal to one if the sum
of current taxes is positive and the sum of pre-tax foreign income is
negative. Values of FETRit greater than one are set equal to one. Pre-tax
foreign income in a given year is set equal to zero if a firm-year is missing
pre-tax foreign income and reports zero current foreign taxes. Current
foreign tax in a given year is set equal to zero if the firm-year is missing
current foreign taxes and reports zero pre-tax foreign income. If a firm-year
is missing both pre-tax foreign income and current foreign taxes, both are set
to zero only if the firm also reports no ETR effect from foreign operations.
PREEstimatedit /PIit
equals the ratio of firm i's PREEstimatedit to the sum of pretax income (pi) from
year t-2 to year t.
32
Appendix A (continued)
Variable Definitions
Variable
TAXEstimatedit /PIit
Definition
equals the ratio of firm i's TAXEstimatedit to the sum of pretax income (pi) from
year t-2 to year t.
BMit
equals firm i's ratio of book value of equity to market value of equity
(ceq/(prcc_f*csho)) at the end of year t
Debtit
an indicator variable equal to one if firm i issued debt in year t (dltis > 0),
and zero otherwise.
Equityit
an indicator variable equal to one if firm i issued common stock in year t
[(cstkt – cstkt-1) > 0 or (cshit – cshit-1) > 0], and zero otherwise.
NAnalystit
equals the number of analysts issuing earnings forecasts for firm i in year t
(I/B/E/S numest).
Instit
equals firm i's ratio of the number of shares held by institutional investors
(Thompson Reuters 13F database shares/1,000,000) to total shares
outstanding (Thompson Reuters 13F database shrout1) at the end of year t.
Litigationit
an indicator variable equal to one if firm i operates in a highly litigated
industry (based on the Francis et al. 1994 classifications), and zero
otherwise. Highly litigated industries are defined as SIC 2833-2836, 87318734, 3570-3577, 7370-7374, 3600-3674, and 5200-5961.
HHIit
equals the decile ranking of the Herfindahl index in year t for firm i's
industry. The Herfindahl index is calculated as the sum of the squares of the
market shares of all firms (listed on Compustat) within a particular two-digit
SIC in year t. A firm's market share equals the ratio of its sales (sale) in year
t to the sum of sales for all firms in its two-digit SIC code in year t.
PROA_Domesticit equals firm i's ratio of domestic pretax income (pidom) to total assets (at) at
the end of year t.
PROA_Foreignit
equals firm i's ratio of foreign pretax income (pifo) to total assets (at) at the
end of year t.
LnSalesit
equals the natural log of firm i's sales (sale) at the end of year t.
Lossit
an indicator variable equal to one if firm i reports a loss in year t (ni < 0),
and zero otherwise.
AJCAt
an indicator variable equal to one for fiscal years 2004 and 2005, and zero
otherwise.
Post2005t
an indicator variable equal to one for fiscal years after 2005, and zero
otherwise.
33
Appendix B
Examples of Sample Footnote Disclosures
Part 1: Typical Disclosure
Altria 12/31/2001 Tax Footnote:
-------------------------------------------------------------------------------2001
2000
1999
-------------------------------------------------------------------------------U.S. federal statutory rate
35.0%
35.0%
35.0%
Increase (decrease) resulting from:
State and local income taxes,
net of federal tax benefit
2.3
2.6
2.5
Rate differences--foreign
operations
(2.3)
(1.2)
(0.6)
Goodwill amortization
2.3
1.3
1.4
Other
0.6
1.0
0.9
-------------------------------------------------------------------------------Effective tax rate
37.9%
38.7%
39.2%
================================================================================
At December 31, 2001, applicable United States federal income taxes and foreign withholding taxes have not been
provided on approximately $5.6 billion of accumulated earnings of foreign subsidiaries that are expected to be
permanently reinvested. The Company is unable to provide a meaningful estimate of additional deferred taxes that
would have been provided were these earnings not considered permanently reinvested.
Treatment: In the most straightforward case, the firm separately discloses its foreign tax rate differential
and either an estimate of TAX or a statement that calculating TAX is not practicable. From this footnote,
we collect the ETR reconciliation items (e.g., -2.3% in 2001) and the TAX related disclosure (“not
practicable”).
Part 2: Comprehensive Disclosure
Kellogg 1/3/2009 Tax Footnote:
U.S. statutory income tax rate
Foreign rates varying from 35%
State income taxes, net of federal benefit
2008
35.0%
−5.0
1.0
2007
35.0%
−4.0
1.1
2006
35.0%
−3.5
1.3
Foreign earnings repatriation
Tax audits
Net change in valuation allowances
Statutory rate changes, deferred tax impact
International restructuring
Other
Effective income tax rate
1.6
−1.5
—
−.1
—
−1.3
29.7%
2.3
—
−.5
−.6
−2.6
−2.0
28.7%
1.2
−1.7
.5
—
—
−1.1
31.7%
During the year, the Company repatriated approximately $710 million of earnings and capital which carried a cash
tax charge of $24 million. This amount was less than the charge recorded during the year due to the impact of
favorable movements in foreign currency. This cost was further offset by foreign tax related items of $16 million,
reducing the net cost of repatriation to $8 million. The Company has provided $18 million of deferred taxes related
to the remaining $290 million of unremitted foreign earnings. These amounts are reflected in the foreign earnings
repatriation line item. At January 3, 2009, accumulated foreign subsidiary earnings of approximately $834 million
were considered indefinitely invested in those businesses. Accordingly, U.S. income deferred taxes have not been
provided on these earnings and it is not practical to estimate the deferred tax impact of those earnings.
Treatment: This example contains the maximum amount of disclosures a firm can make in one year.
While rare, this provides insight into our overall data collection process. As described in Section 4.1, we
collected the (a) cumulative amount of disclosed PRE ($834 million, PREReported), (b) cumulative amount
34
of disclosed TAX (or “not practicable” disclosure, as is the case here), (c) current year ETR benefit from
), (d) current year tax
declaring current earnings permanently reinvested (-5%,
expense or benefit associated with repatriation ($8 million expense,
), (e) current year
tax expense associated with removing the PRE designation from prior year foreign earnings ($18 million,
), (f) current year tax benefit associated with converting prior year foreign earnings
to PRE (not applicable - since Kellogg has item (e) this year they will not have item (f)).
Part 3: Non-Discloser
Coach 6/30/2007 Tax Footnote:
The Company accounts for income taxes in accordance with SFAS 109, “Accounting for Income Taxes.”
Under SFAS 109, a deferred tax liability or asset is recognized for the estimated future tax consequences
of temporary differences between the carrying amounts of assets and liabilities in the financial statements
and their respective tax bases. Coach does not provide for U.S. income taxes on the unremitted earnings
of its foreign subsidiaries as the Company intends to permanently reinvest these earnings.
Fiscal Year Ended
June 30, 2007
Amount
Tax expense at U.S. statutory rate
State taxes, net of federal
benefit
Reversal of deferred U.S. taxes on foreign
earnings
Foreign income subject to reduced tax rates
Other, net
Taxes at effective worldwide rates
$362,135
Percentage
35.0%
July 1, 2006
Amount
$261,565
Percentage
35.0%
July 2, 2005
Amount
$192,997
Percentage
35.0%
38,910
3.8
27,164
3.6
29,287
5.3
—
0.0
—
0.0
(16,247)
(2.9)
(4,458)
(0.8)
(447)
(0.1)
(13,892)
(1.3)
(11,548)
(1.5)
10,988
1.0
6,309
0.8
$398,141
38.5%
$283,490
37.9%
$201,132
36.5%
Treatment: This firm separately discloses its foreign tax rate differential, which we capture in our data
collection (e.g., -$13.892 million in 2007). Despite the presence of an ETR reconciling item and an
explicit statement that the firm does not record U.S. taxes on permanently reinvested earnings, this firm
makes no disclosure related to either PRE or TAX.
35
References
Abahoonie, E. and Y. Barbut. 2012. Undistributed Foreign Earnings: Disclosure Requirements
and Considerations. PricewaterhouseCoopers Practical Tip No. 2012-03.
Accounting Principles Board (APB). 1972. Accounting for Income Taxes – Special Areas. APB
Opinion No. 23. New York, NY: APB.
Atiase, R.K., H. Li, S. Supattarakul, and S. Tse. 2005. Market Reaction to Multiple
Contemporaneous Earnings Signals: Earnings Announcements and Future Earnings
Guidance. Review of Accounting Studies 10: 497-525.
Aubin, D. 2013. U.S. Companies' Overseas Earnings Hit Record $1.9 Trillion – Study. Reuters
(May 8, 2013).
Baginski, S.P., J.M. Hassell, and M.D. Kimbrough. 2004. Why Do Managers Explain their
Earnings Forecasts? Journal of Accounting Research 42 (1): 1-29.
Bamber, L.S. and Y.S. Cheon. 1998. Discretionary Management Earnings Forecast Disclosures:
Antecedents and Outcomes Associated with Forecast Venue and Forecast Specificity
Choices. Journal of Accounting Research 36 (2): 167-190.
Bamber, L.S., J.X. Jiang, K.R. Petroni, and I.Y. Wang. 2010. Comprehensive Income: Who’s
Afraid of Performance Reporting? The Accounting Review 85 (1): 97-126.
Barth, M. E., M. F. McNichols, and G. P. Wilson. 1997. Factors Influencing Firms’ Disclosures
about Environmental Liabilities. Review of Accounting Studies 2: 35-64.
Bauman, M. and K. Shaw. 2008. The Usefulness of Disclosures of Untaxed Foreign Earnings in
Firm Valuation. The Journal of the American Taxation Association 30 (2): 53-77.
Blouin, J., L. Krull, and L. Robinson. 2012a. Is U.S. Multinational Dividend Repatriation Policy
Influenced by Reporting Incentives? The Accounting Review 87 (5): 1463-1491.
Blouin, J., L. Krull, and L. Robinson. 2012b. Where in the World are “Permanently Reinvested”
Foreign Earnings? Working paper, University of Pennsylvania, University of Oregon,
and Dartmouth College.
Botosan, C. 1997. Disclosure Level and the Cost of Equity Capital. The Accounting Review 72
(3): 323-349.
Bryant-Kutcher, L., L. Eiler, and D. Guenther. 2008. Taxes and Financial Assets: Valuing
Permanently Reinvested Foreign Earnings. National Tax Journal 61 (4): 699-720.
Bushee, B.J., D.A. Matsumoto, and G.S. Miller. 2003. Open versus Closed Conference Calls:
The Determinants and Effects of Broadening Access to Disclosure. Journal of
Accounting and Economics 34: 149-180.
36
Chen, F., Y. Hou, G. Richardson, and M. Ye. 2013. Auditor Quality and Litigation Loss
Contingency Disclosures. Working paper, University of Toronto.
Collins, J., J. Hand, and D. Shackelford. 2001. Valuing Deferral: The Effect of Permanently
Reinvested Foreign Earnings on Stock Prices. In International Taxation and Multinational
Activity, ed. J. Hines, 143-171. Chicago: University of Chicago Press.
De Waegenaere, A. and R. Sansing. 2008. Taxation of International Investment and Accounting
Valuation. Contemporary Accounting Research 25 (4): 1045-1066.
Dhaliwal, D., C. Gleason, and L. Mills. 2004. Last-Chance Earnings Management: Using the
Tax Expense to Meet Analysts’ Forecasts. Contemporary Accounting Research 21 (2):
431-459.
Dixon, K. 2012. Microsoft, HP Skirted Taxes via Offshore Units: Senate Panel. Reuters
(September 20, 2012).
Donohoe, M.P., G.A. McGill, and E. Outslay. 2012. Through a Glass Darkly: What Can We
Learn about a U.S. Multinational Corporation’s International Operations from its
Financial Statement Disclosures? National Tax Journal 65 (4): 961-984.
Edwards, A., T. Kravet, and R. Wilson. 2013. Trapped Cash and the Profitability of Foreign
Acquisitions. Working Paper, University of Toronto, University of Texas at Dallas, and
University of Iowa.
Eiler, L.A. and L. Kutcher. 2012. Disclosure Decisions Surrounding Permanently Reinvested
Foreign Earnings. Working paper, California State University- Fullerton and Colorado
State University.
Francis, J., D. Philbrick, and K. Schipper. 1994. Shareholder Litigation and Corporate
Disclosures. Journal of Accounting Research 32 (2): 137-164.
Francis, J., D. Nanda, and P. Olsson. 2008. Voluntary Disclosure, Earnings Quality, and Cost of
Capital. Journal of Accounting Research 46 (1): 53-99.
Frischmann, P., T. Shevlin, and R. Wilson. 2008. Economic Consequences of Increasing the
Conformity in Accounting for Uncertain Tax Benefits. Journal of Accounting and
Economics 46: 261-278.
Gleason, C. and L. Mills. 2002. Materiality and Contingent Tax Liability Reporting. The
Accounting Review 77 (2): 317-342.
Graham, J.R., M. Hanlon, and T. Shevlin. 2011. Real Effects of Accounting Rules: Evidence
from Multinational Firms’ Investment Location and Profit Repatriation Decisions.
Journal of Accounting Research 49 (1): 137-185.
Hanlon, M., R. Lester, and R. Verdi. 2012. The Effect of Repatriation Tax Costs on U.S.
Multinational Investment. Working paper, Massachusetts Institute of Technology.
37
Healy, P. and K. Palepu. 2001. Information Asymmetry, Corporate Disclosure, and the Capital
Markets: A Review of the Empirical Disclosure Literature. Journal of Accounting and
Economics 31: 405-440.
Heitzman, S., C. Wasley, and J. Zimmerman. 2010. The Joint Effects of Materiality Thresholds
and Voluntary Disclosure Incentives on Firms’ Disclosure Decisions. Journal of
Accounting and Economics 49: 109-132.
Hoffelder, K. 2012. Tax Incentive Helps Multinationals Repatriate 20% Less, Study Finds.
CFO.com (November 12, 2012).
Kinney, W.R., Z.V. Palmrose, and S. Scholz. 2004. Auditor Independence, Non-Audit Services,
and Restatements: Was the U.S. Government Right? Journal of Accounting Research 42
(3): 561-588.
Kocieniewski, D. 2011. Companies Push for Tax Break on Foreign Cash. The New York Times
(June 19, 2011).
Levin, C. 2012. Statement before U.S. Senate Permanent Subcommittee on Investigations of
Offshore Profit and the U.S. Tax Code (September 20, 2012).
Levin, C. and T. Coburn. 2012. Offshore Profit Shifting and the U.S. Tax Code. Senate
Permanent Subcommittee on Investigations (September 20, 2012).
Li, E., C. Wasley, and J. Zimmerman. 2012. Should Management Earnings Guidance be Pooled?
Classifying Management Earnings Guidance into Capital Market, Opportunistic, and
Disclose or Abstain Rationales: Implications for Research. Working paper, Baruch
College and University of Rochester.
Li, Y., G. D. Richardson, and D. B. Thornton. 1997. Corporate Disclosure of Environmental
Liability Information: Theory and Evidence. Contemporary Accounting Research 14 (3):
435-474.
Linebaugh, K. 2012. Top U.S. Firms are Cash-Rich Abroad, Cash-Poor at Home. Wall Street
Journal (December 4, 2012).
Oler, M., T. Shevlin, and R. Wilson. 2007. Examining Investor Expectations Concerning Tax
Savings on the Repatriations of Foreign Earnings under the American Jobs Creation Act
of 2004. The Journal of the American Taxation Association 29 (2): 25-55.
Peters, G.F. and A.M. Romi. 2013. Discretionary Compliance with Mandatory Environmental
Disclosures: Evidence from SEC Filings. Journal of Accounting and Public Policy
Forthcoming.
Rauf, D.S. 2012. Guess Who’s Pushing for Tax Holiday? Politico (April 5, 2012).
Reilly, D. 2012. Foreign Profits Can Create Earnings Illusion. Wall Street Journal (October 8,
2012).
38
Rice, S. and D. Weber. 2012. How Effective is Internal Control Reporting under SOX 404?
Determinants of the (Non-)Disclosure of Existing Material Weaknesses. Journal of
Accounting Research 50 (3): 811-843.
Robinson, J.R., Y. Xue, and Y. Yu. 2011. Determinants of Disclosure Noncompliance and the
Effect of SEC Review: Evidence from the 2006 Mandated Compensation Disclosure
Regulations. The Accounting Review 86 (4): 1415-1444.
Robinson, L. and A. Schmidt. 2013. Firm and Investor Reponses to Uncertain Tax Benefit
Disclosure Requirements. Journal of the American Taxation Association Forthcoming.
Rogers, J.L. and P.C. Stocken. 2005. Credibility of Management Forecasts. The Accounting
Review 80 (4): 1233-1260.
Skinner, D. 1994. Why Firms Voluntarily Disclose Bad News. Journal of Accounting Research
32 (1): 38-60.
Svensson, P. 2012. How Apple’s Phantom Taxes Hide Billions in Profit. Associated Press (July
23, 2012).
Tully, S. 2011. The Investor's Stake in Corporate Tax Reform. CNN Money (April 13, 2011).
Verrecchia, R.E. 1983. Discretionary Disclosure. Journal of Accounting and Economics 5: 179194.
Verrecchia, R.E. 1990. Information Quality and Discretionary Disclosure. Journal of Accounting
and Economics 12: 365-380.
Verrecchia, R.E. and J. Weber. 2006. Redacted Disclosure. Journal of Accounting Research 44
(4): 791-814.
Wagenhofer, A. 1990. Voluntary Disclosure with a Strategic Opponent. Journal of Accounting
and Economics 12: 341-363.
Whitehouse, T. 2011. SEC Squinting at Overseas Earnings. Compliance Weekly (June 14, 2011).
Zechman, S. 2010. The Relation between Voluntary Disclosure and Financial Reporting:
Evidence from Synthetic Leases. Journal of Accounting Research 48 (3): 725-765.
39
Table 1
Sample Selection
Data Restrictions
Compustat firm-year observations for all firms appearing
in the S&P 500 from 1999-2010
Less:
REIT firm-years (entities with no corporate level taxes)
Firm-years missing basic Compustat data (SIC, CIK,
stock price)
Foreign firm-years (e.g., 20-F filers)
Firm-years subject to ownership by another firm
N
8,476
(236)
(359)
(44)
(51)
7,786
Total observations to be hand collected
Less:
Firm-years with errors in disclosure
Firm-years missing Form 10-K
(6)
(112)
7,668
Total valid hand collected observations
Less:
Firm-years missing required info (e.g., Foreign ETR)
Firm-years disclosing PRE less than or equal to 0
Firm-years not required to disclose PRE
(2,039)
(144)
(2,069)
3,416
Full Sample
Less:
Firms missing necessary I/B/E/S and Thomson-Reuters data
(e.g., Number of Analysts, Institutional Ownership)
(319)
3,097
Regression Sample
40
Table 2
Descriptive Statistics by Year
Panel A: PRE Disclosure Statistics by Year
1999
2000
Sample composition
Disclosure firm-years
173
180
Non-disclosure firm-years
30
40
Total firm-years
203
220
Non-disclosers
% of sample
PRE Reported ($ in billions)
PRE Estimated ($ in billions)
Mean PRE Estimated ($ in billions)
Disclosers
% of sample
PRE Reported ($ in billions)
PRE Estimated ($ in billions)
PRE Reported /PRE Estimated (%)
14.8%
0.0
9.9
0.33
18.2%
0.0
33.7
0.84
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Total
195
38
233
212
37
249
240
39
279
263
39
302
264
38
302
275
39
314
287
38
325
284
39
323
289
42
331
292
43
335
2,954
462
3,416
16.3%
0.0
25.2
0.66
14.9%
0.0
21.6
0.58
14.0%
0.0
12.6
0.32
12.9%
0.0
17.9
0.46
12.6%
0.0
19.3
0.51
12.4%
0.0
28.4
0.73
11.7%
0.0
41.6
1.09
12.1%
0.0
35.7
0.91
12.7%
0.0
75.6
1.80
12.8%
0.0
84.2
1.96
13.5%
0.0
405.7
0.88
85.2% 81.8% 83.7% 85.1% 86.0% 87.1% 87.4% 87.6% 88.3% 87.9% 87.3% 87.2% 86.5%
190.2
232.1
269.9
312.1
381.9
441.3
362.9
537.8
697.5
804.9
871.4 1,024.0 6,125.9
126.2
74.4
143.5
244.1
286.8
345.8
314.2
372.9
388.2
517.5
524.6
577.5 3,915.6
150.8% 312.2% 188.1% 127.9% 133.1% 127.6% 115.5% 144.2% 179.7% 155.5% 166.1% 177.3% 156.4%
Full Sample
136.1
PRE Estimated ($ in billions)
% held by disclosers
92.7%
See Appendix A for variable definitions.
108.0
68.8%
168.8
85.0%
265.7
91.9%
299.4
95.8%
41
363.6
95.1%
333.5
94.2%
401.3
92.9%
429.8
90.3%
553.2
93.6%
600.2
87.4%
661.7 4,321.3
87.3% 90.6%
Table 2 (continued)
Descriptive Statistics by Year
Panel B: TAX Disclosure Statistics by Year
1999
2000
Sample composition
Disclosure firm-years
55
56
Non-disclosure firm-years
148
164
Total firm-years
203
220
Non-disclosers
% of sample
TAX Reported ($ in billions)
TAX Estimated ($ in billions)
Mean TAX Estimated ($ in billions)
Disclosers
% of sample
TAX Reported ($ in billions)
TAX Estimated ($ in billions)
TAX Estimated /TAX Reported (%)
72.9%
0.00
9.57
0.06
74.5%
0.00
15.50
0.09
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Total
57
176
233
60
189
249
58
221
279
79
223
302
71
231
302
77
237
314
70
255
325
67
256
323
67
264
331
63
272
335
780
2,636
3,416
75.5%
0.00
21.25
0.12
75.9%
0.00
25.96
0.14
79.2%
0.00
29.02
0.13
73.8%
0.00
34.38
0.15
76.5%
0.00
36.70
0.16
75.5%
0.00
46.16
0.19
78.5%
0.00
58.70
0.23
79.3%
0.00
74.15
0.29
79.8%
0.00
76.62
0.29
81.2%
0.00
82.23
0.30
77.2%
0.00
510.24
0.19
27.1% 25.5% 24.5% 24.1% 20.8% 26.2% 23.5% 24.5% 21.5% 20.7% 20.2% 18.8% 22.8%
7.55
10.71
8.28
8.26
10.22
12.80
11.45
21.81
27.15
32.45
42.24
49.48 242.39
3.07
3.42
3.55
3.91
4.72
7.85
8.81
13.23
14.48
17.64
21.86
26.88 129.42
246.1% 313.7% 232.9% 211.3% 216.4% 163.1% 129.9% 164.9% 187.4% 183.9% 193.2% 184.1% 187.3%
Full Sample
12.64
TAX Estimated ($ in billions)
% held by disclosers
24.3%
See Appendix A for variable definitions.
18.92
18.1%
24.80
14.3%
29.87
13.1%
33.75
14.0%
42
42.23
18.6%
45.51
19.4%
59.38
22.3%
73.18
19.8%
91.79
19.2%
98.48
22.2%
109.11
24.6%
639.66
20.2%
Table 3
Descriptive Statistics partitioned by Disclosure Status
Panel A: Partitioned by PRE Disclosure Status
Disclosers (N= 2,717)
Non-Disclosers (N= 380)
Variable
PREEstimated/PI
Mean
0.2520
StdDev
0.4962
Q1
0.0000
Median
0.0487
Q3
0.3298
Mean
StdDev
0.2357
Q1
Median
Q3
***
0.5368
0.0000
0.0000
0.2114
0.0415
0.0039
0.0193
0.0443
TAXEstimated/PI
0.0455
0.0738
0.0008
0.0201
0.0637
0.0334
BM
0.3817
0.2902
0.2007
0.3278
0.5032
0.3706
0.2605
0.1995
0.3137
0.5056
Debt
0.6456
0.4784
0.0000
1.0000
1.0000
0.6789
0.4675
0.0000
1.0000
1.0000
Equity
0.6238
0.4845
0.0000
1.0000
1.0000
0.6632
0.4733
0.0000
1.0000
Litigation
0.3471
0.4761
0.0000
0.0000
1.0000
0.2053
Loss
0.1310
0.3375
0.0000
0.0000
0.0000
0.1289
HHI
***
***
**
1.0000
***
0.4044
0.0000
0.0000
0.0000
0.3356
0.0000
0.0000
0.0000
11.7576
6.0000
10.0000
17.5000
15.9595
14.8472
6.0000
10.0000
22.0000
14.2526
PROA_Domestic
0.0449
0.0751
0.0074
0.0432
0.0842
0.0442
0.0780
0.0101
0.0403
0.0746
PROA_Foreign
0.0446
0.0458
0.0110
0.0334
0.0676
0.0417
0.0454
0.0092
0.0350
0.0659
15.1980
7.5256
10.0000
14.0000
20.0000
14.5868
7.1124
9.0000
14.0000
NAnalyst
Inst
0.7609
0.1514
0.6716
0.7811
0.8680
0.7794
**
0.1512
0.6975
0.7932
19.0000
**
0.8897
LnSales
8.7252
1.2735
7.7680
8.6167
9.5153
8.4432
1.2785 7.5043
8.5085
9.3571
***, **, * indicate significant differences in means or medians between disclosers and non-disclosers at the 1%, 5%, or 10% level,
respectively. See Appendix A for variable definitions.
***
43
***
Table 3 (continued)
Descriptive Statistics partitioned by Disclosure Status
Panel B: Partitioned by TAX Disclosure Status
Disclosers (N= 648)
Non-Disclosers (N= 2,069)
Variable
PREEstimated/PI
Mean
0.2059
StdDev
0.3729
Q1
0.0000
Median
0.0356
Q3
0.2964
Mean
0.2664
***
***
TAXEstimated/PI
0.0361
0.0514
0.0000
0.0153
0.0560
0.0484
BM
0.3795
0.2927
0.1934
0.3242
0.4959
0.3824
Debt
0.5787
0.4941
0.0000
1.0000
1.0000
0.6665
Equity
0.6173
0.4864
0.0000
1.0000
1.0000
0.6259
Litigation
0.3843
0.4868
0.0000
0.0000
1.0000
0.3354
Loss
0.1343
0.3412
0.0000
0.0000
0.0000
0.1300
HHI
PROA_Domestic
PROA_Foreign
NAnalyst
Inst
17.4460
0.0508
15.3558
0.0827
6.0000
0.0081
11.0000
0.0484
27.0000
0.0944
15.4940
0.0520
0.0793
0.0017
0.0218
0.2895
0.2035
0.3288
0.4716
0.0000
1.0000
0.4840
0.0000
1.0000
0.4723
0.0000
0.0000
0.3364
0.0000
0.0000
14.6571
6.0000
10.0000
0.0066
0.0417
0.0443
0.0113
0.0328
7.3864
10.0000
14.0000
0.0735
0.0436
15.6358
7.9442
10.0000
15.0000
20.0000
15.0609
0.8553
0.0000
0.0724
0.0355
0.7775
0.5282
*
0.0099
0.6722
***
Median
0.0430
0.0502
0.1475
**
Q1
**
0.0478
0.7505
***
StdDev
0.7642
**
0.1525
0.6716
0.7821
Q3
0.3424
***
0.0656
0.5041
***
1.0000
1.0000
**
1.0000
0.0000
***
**
20.0000
0.0810
0.0660
20.0000
*
0.8736
LnSales
8.5928
1.1684
7.6706
8.4403
9.3253
8.7666
1.3021
7.8169
8.6611
9.5658
***, **, * indicate significant differences in means or medians between disclosers and non-disclosers at the 1%, 5%, or 10% level,
respectively. See Appendix A for variable definitions.
***
44
***
Table 4
Correlation Table
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Variable
(1) PREReported
1.0000
0.5657
0.2266
0.1498
0.5456
0.7761
0.0817
0.1830
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(0.0377)
(<0.0001)
(2) PREEstimated
0.4869
1.0000
0.1007
0.5795
0.4775
0.7023
0.0966
0.2889
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(0.0098)
(<0.0001)
(3) PREReported/PI
0.6071
0.3197
1.0000
0.2698
0.1954
0.1499
0.8353
0.4618
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(4) PREEstimated/PI
0.3656
0.9432
0.4007
1.0000
0.1511
0.2455
0.1573
0.5006
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(5) TAXReported
0.7121
0.4381
0.4881
0.3710
1.0000
0.9121
0.2912
0.3441
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(6) TAXEstimated
0.6290
0.7344
0.3777
0.6568
0.5534
1.0000
0.1652
0.3646
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(7) TAXReported/PI
0.4482
0.4195
0.6771
0.4511
0.8313
0.4139
1.0000
0.3605
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(8) TAXEstimated/PI
0.4096
0.6485
0.5156
0.7107
0.4360
0.8626
0.5013
1.0000
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
(<0.0001)
We report Pearson (Spearman) correlations above (below) the diagonal and list p-values in parentheses below each correlation. See
Appendix A for variable definitions.
45
Table 5
Determinants of PRE Disclosure
Disclosureit = β0 + β1PREEstimated/PIit + β2TAXEstimated/PIit + β3BMit + β4Debtit + β5Equityit +
β6Litigationit + β7Lossit + β8HHIit + β9PROA_Domesticit + β10PROA_Foreignit + β11NAnalystit +
β12Instit + β13LnSalesit + εit
Variable
Intercept
Coefficient
(p-value)
0.1855
(0.8770)
-0.1661
(0.3860)
3.4243
(0.0600)
0.2383
(0.4670)
-0.1639
(0.1730)
-0.1466
(0.2345)
0.8677
(0.0025)
0.0997
(0.7330)
0.0141
(0.0515)
0.6757
(0.6850)
1.6577
(0.5120)
-0.0074
(0.3265)
-0.6628
(0.1580)
0.2168
(0.0860)
Pred.
?
PREEstimated/PI
?
TAXEstimated/PI
?
BM
?
Debt
+
Equity
+
Litigation
+
Loss
?
HHI
+
PROA_Domestic
?
PROA_Foreign
?
NAnalyst
+
Inst
-
LnSales
?
N
3,097
3.73
Pseudo-R2
% Correctly Predicted
63%
***, **, * represent significance at the one percent, five percent, and ten percent levels,
respectively. We use Huber-White robust standard errors clustered by firm to control for
heteroscedasticity and serial correlation. We report one-tailed p-values for coefficients with
directional predictions and define variables in Appendix A.
46
*
***
*
*
Table 6
Determinants of TAX Disclosure
Disclosureit = β0 + β1PREEstimated/PIit + β2TAXEstimated/PIit + β3BMit + β4Debtit + β5Equityit +
β6Litigationit + β7Lossit + β8HHIit + β9PROA_Domesticit + β10PROA_Foreignit +
β11NAnalystit + β12Instit + β13LnSalesit + εit
Variable
Intercept
Pred.
?
PREEstimated/PI
?
TAXEstimated/PI
-
BM
?
Debt
+
Equity
+
Litigation
+
Loss
?
HHI
+
PROA_Domestic
?
PROA_Foreign
?
NAnalyst
+
Inst
-
LnSales
?
N
Coefficient
(p-value)
0.3007
(0.7530)
-0.1401
(0.3760)
-3.3750
(0.0245)
0.2570
(0.3650)
-0.2301
(0.9060)
-0.1112
(0.2605)
0.2430
(0.1560)
0.2797
(0.2230)
0.0153
(0.0210)
1.0352
(0.4550)
4.7444
(0.0370)
0.0144
(0.1490)
-0.8282
(0.0885)
-0.1626
(0.0710)
**
**
**
*
*
2,717
2
2.96
Pseudo-R
% Correctly Predicted
62%
***, **, * indicate significance at the one percent, five percent, and ten percent levels,
respectively. We use Huber-White robust standard errors clustered by firm to control for
heteroscedasticity and serial correlation. We report one-tailed p-values for coefficients with
directional predictions and define variables in Appendix A.
47
Table 7
Determinants of Disclosure Including AJCA Effects
Disclosureit = β0 + β1AJCAt + β2Post2005t + β3PREEstimated/PIit + β4 TAXEstimated/PIit + β5BMit + β6Debtit +
β7Equityit + β8Litigationit + β9Lossit + β10HHIit + β11PROA_Domesticit + β12PROA_Foreignit +
β13NAnalystit + β14Instit + β15LnSalesit + εit
(1)
(2)
TAX
PRE Disclosure
Disclosure
Variable
Intercept
Pred.
?
AJCA
+
Post2005
+
PREEstimated/PI
?
TAXEstimated/PI
?
BM
?
Debt
+
Equity
+
Litigation
+
Loss
?
HHI
+
PROA_Domestic
?
PROA_Foreign
?
NAnalyst
+
Inst
-
LnSales
?
N
Coefficient
(p-value)
0.5187
(0.6740)
0.3381
(0.0395)
0.2573
(0.1015)
-0.1693
(0.3730)
3.2251
(0.0720)
0.2215
(0.5030)
-0.1376
(0.2190)
-0.1437
(0.2400)
0.8522
(0.0030)
0.1089
(0.7080)
0.0146
(0.0475)
0.5669
(0.7350)
1.5108
(0.5550)
-0.0052
(0.3765)
-1.0127
(0.0690)
0.1856
(0.1530)
Pred.
?
**
?
?
?
*
?
+
+
***
+
?
**
+
?
?
+
*
?
3,097
Coefficient
(p-value)
0.2843
(0.7760)
0.1683
(0.2660)
0.0047
(0.9800)
-0.1404
(0.3730)
-3.3722
(0.0255)
0.2692
(0.3480)
-0.2260
(0.9000)
-0.1119
(0.2600)
0.2422
(0.1570)
0.2945
(0.2000)
0.0153
(0.0215)
1.0367
(0.4550)
4.7878
(0.0360)
0.0143
(0.1505)
-0.8509
(0.1010)
-0.1635
(0.0830)
**
**
**
*
2,717
2
Pseudo-R
3.95
3.03
% Correctly Predicted
64%
62%
***, **, * indicate significance at the one percent, five percent, and ten percent levels, respectively. We use
Huber-White robust standard errors clustered by firm to control for heteroscedasticity and serial correlation.
We report one-tailed p-values for coefficients with directional predictions and define variables in Appendix
A.
48