Voluntary disclosure responses to mandated disclosure: evidence from Australian corporate tax transparency

2019-04-10In this paper, I study how mandated disclosures influence firms’ voluntary disclosure decisions and subsequently, how voluntary disclosures shape market reactions to mandatory disclosures. Specifically, I examine Australian firms’ voluntary disclosure responses to the involuntary disclosure of their tax returns. Tax return information is difficult to understand and most difficult when it largely differs from a firm’s previously reported financial statements. As the cost to understand a disclosure increases, theory predicts that the average precision of investors’ beliefs decreases, which may prompt managers to issue clarifying information. I find support for this theory as firms with large differences between their tax return and financial statement values are more likely to issue voluntary disclosures that supplement their tax return information. Further, my evidence suggests that voluntary disclosures shift investors’ attention away from the difference between a firm’s tax return values and its financial statement values