How do investors value the publication of tax information? Evidence from the European public country-by-country reporting

Abstract

We examine the costs associated with public disclosure, as opposed to confidential reporting, of tax country-by-country reporting (CbCR) information. Our study addresses a critical knowledge gap, considering the growing adoption of public tax transparency measures. We aim to illuminate this matter by examining the expected costs for firms of making previously confidential CbCR information publicly available. The fact that the information was previously confidentially reported to the tax authorities allows us to assess the cost of publication in isolation. Employing an event study methodology, we provide early evidence on the capital market reaction to this new requirement on a sample of European firms falling within its scope. We document a significantly negative cumulative average abnormal return of EUR 47 billion to 64 billion for up to 3 days following the announcement. Additional cross-sectional results suggest that concerns about the reputational costs arising from public scrutiny and the proprietary costs from disclosing sensitive business information outweigh the potential benefits of an extended information environment from an investor perspective. Our findings highlight that the public disclosure of tax information imposes significant—and likely unintended—costs from a firm perspective. This aspect should be carefully considered when developing tax transparency measures.