Public Tax Disclosures and Investor Perceptions

Abstract

To spotlight whether firms pay their "fair share'' and thereby crowd out aggressive tax avoidance, regulators are increasingly mandating tax disclosures. The assumption is that disclosures should help users identify aggressive tax avoiders. However, we find retail investors become worse at identifying firms using aggressive avoidance methods once receiving designated tax disclosures along with standard effective tax rate reconciliations. This experimental finding is consistent with our prediction rooted in attribute substitution theory that investors fixate on the designated tax disclosures when forming perceptions about whether firms pay their fair share. Our findings call for caution when implementing mandatory public tax disclosure.