Tax numbers and ETR forecasting

Abstract This study examines the determinants and implications of the volume of tax-related numbers reported in the financial statements. I document that the volume of tax numbers increases with tax reporting requirements and decreases with the complexity of the tax rate, implying that firms with greater proprietary costs decrease their numeric disclosures once they meet mandatory reporting requirements. With respect to implications, I document that firms reporting more tax numbers improve the transparency of the information environment, reducing the errors and dispersion of analysts’ implied effective tax rate forecasts. In contrast, greater emphasis on narrative tax disclosure does not reduce information frictions, highlighting an important trade-off between numeric detail and strategic narratives. Further investigation suggests that this relationship is driven by more tax numbers in the financial statement footnotes rather than in the face financial statements. These findings suggest firms’ tax information environment improves with a greater volume of numeric tax-related disclosures.