The Effect of FIN 48 on Firms’ Tax- Reporting Behavior
Very Preliminary
Please do not quote, cite, or distribute without the permission of the authors.
Amy Dunbar*
University of Connecticut
John Phillips
University of Connecticut
George Plesko
University of Connecticut
September 24, 2009
*
Corresponding Author: University of Connecticut, 2100 Hillside Road, Unit 1041, Storrs, CT,
06269-1041; Phone (860) 486-5138; E-mail: [email protected].
We have greatly benefitted from discussions with Charles Boynton. Plesko acknowledges
support from the Internal Revenue Service's Tax Statistics Research Program. The views
expressed in this paper are those of the authors, and should not be attributed to the Internal
Revenue Service or the Department of the Treasury. All errors or omissions are our own.
The Effect of FIN 48 on Firms’ Tax-Reporting Behavior
ABSTRACT:
We utilize a panel of corporate tax return information to estimate whether the implementation of
FASB Interpretation (FIN) 48, Accounting for Uncertainty in Income Taxes, had an effect on the
publicly-traded firms’ tax reporting activities. This research is important because it addresses
whether the implementation of FIN 48 affected both the book-tax reporting prior to
implementation and tax planning subsequent to implementation. Our design exploits the
availability of data for both public firms, which are subject to FIN 48 disclosure requirements,
and private firms, which are not, to isolate the interpretation’s effects, along with information
from the Form 1120, Schedule M-3, which provides a detailed reconciliation of book-tax
accounting differences. Our results provide little support for the hypothesis that public firms
subject to FIN 48 decreased their tax-reducing behavior relative to private firms, although we
find some evidence that large public multinational firms altered their behavior upon adoption of
FIN 48. In contrast to previous research using publicly available financial information, we do not
find any support for the hypothesis that public firms engaged in tax-reserve planning in
anticipation of adopting FIN 48, at least with respect to their domestic activities.
The Effect of FIN 48 on Tax–Reporting Behavior
I. INTRODUCTION
This study examines firms’ tax reporting behavior and the corresponding accounting for
uncertain tax positions before and after public firms’ adoption of FASB Interpretation (FIN) 48,
Accounting for Uncertainty in Income Taxes – An Interpretation of FAS 109. Utilizing
confidential tax return data, we investigate whether the adoption of FIN 48 affected public firms’
propensities to engage in tax-reducing behavior. We also address whether firms’ with high tax
reserves in 2005, the year before publicly-traded firms implemented FIN 48, decreased their
reserves in 2006 in anticipation of implementing FIN 48. Answering these questions is
important because doing so provides evidence on the effect of financial accounting regulation on
firms’ tax planning behavior, a real economic effect, and on firms’ book-tax reporting, an
accounting choice effect.
The accounting failures of the early 21st century and subsequent passage of the SarbanesOxley Act of 2002 heightened the focus on U.S. publicly held corporations’ reporting of income
tax expense. On July 14, 2005, the FASB issued an exposure draft, “Proposed Interpretation,
Accounting for Uncertain Tax Positions, an interpretation of FASB Statement No. 109.”1 The
intent of FIN 48, which became effective for public firms for years beginning after December 15,
2006, was to provide uniformity in how firms accounted for open tax positions. FIN 48 also
increased public firms’ required disclosures regarding the tax reserve, the difference between tax
benefits recognized on the tax return and those benefits recognized on the income statement.
Critics of the FIN 48 disclosures argue that they provide a roadmap of uncertain tax
positions to the tax authority.2 Mills et al. (2009) address this issue analytically by introducing a
1
FASB Exposure Draft No. 1215-001, Accounting for Uncertain Tax Positions – An Interpretation of FASB
Statement No. 109 (July 14, 2005) http://www.fasb.org/draft/ed_prop_interp_utp.pdf
2
Marie Leone, “FIN 48: Standing Naked Before the IRS,” CFO.com, May 22, 2007.
1
mandatory taxpayer disclosure to the tax compliance model of strategic interaction between the
taxpayer and the government developed in Beck and Jung (1989). Mills et al. (2009) concludes
that while FIN 48 may make the tax authority better off, FIN 48 may also benefit taxpayers with
strong tax positions that result in low tax reserves. Thus, firms with low reserves may not change
conservative tax-reducing behavior. The disclosure of high tax reserves, however, increases the
probability that the government examines the return, so firms may be less likely to engage in taxreducing behavior. Mills et al. assume the taxpayer has only one uncertain tax position and one
filing jurisdiction. The actual reserve disclosure, however, includes unrecognized tax benefits
from multiple jurisdictions, years, and issues. Gupta et al. (2009) test the Mills et al. model by
examining the effect of FIN 48 on state tax compliance. They provide evidence that firms with
weaker state tax positions have higher state effective tax rates after FIN 48.
This study first examines the effect of FIN 48 on U.S. federal tax reporting. Specifically,
we examine whether firms subject to the FIN 48 disclosure requirements altered their taxreducing behavior in response to such requirements. Using confidential corporate tax return data
from the Form 1120 Schedule M-3, we measure a firm’s tax-reducing behavior as the level of
permanent book-tax differences and grossed-up other credits (i.e., excluding the foreign tax
credit) scaled by total assets, as disclosed on Form 1120, Line 11. We compare this measure in
the FIN 48 adoption year to the year before adoption and, consistent with prior research, expect
public firms subject to the FIN 48 disclosure requirements to have decreased their tax reducing
behavior relative to a control group of private firms which are not subject to FIN 48. In addition,
we investigate whether FIN 48 had a differential effect on publicly-traded firms with foreign
operations. On one hand, because the FIN 48 footnote disclosure provides only the total
unrecognized tax benefits, we cannot determine the tax reserve by jurisdiction. Thus, the
disclosure provides less information to tax authorities, and could provide publicly-traded
2
multinational corporations an opportunity to to engage in relatively more tax-reducing behavior
than their domestic-only counterparts. On the other hand, the IRS has shown more restraint in
requesting tax workpapers, while foreign tax authorities may be more aggressive with such
requests.3 (e.g., Lynn and Smiley 2007). Given that access to tax accrual workpapers helps a tax
authority identify a greater amount of a firms’ uncertain tax positions, and that FIN 48 leads to
better documentation of such positions, firms operating outside the U.S. may have a greater
incentive to curtail their tax-reducing activities. We are thus uncertain of the impact of FIN 48 on
publicly-traded multinational firms’ tax-reducing behavior.
Our results provide mixed support for the hypotheses that public firms altered their
reporting behavior relative to private firms. Overall, we find little evidence that public firms
engaged in less tax-reducing behavior in the FIN 48 adoption year relative to private firms and
only modest evidence consistent with FIN 48 having a differential effect on public firms with
foreign operations. This evidence, however, is counterintuitive in that we find that taxable large
public multinationals engaged in relatively less tax-reducing behavior upon adopting FIN 48
whereas nontaxable large multinational firms engaged in relatively more tax-reducing behavior.
Next, we examine firms’ annual changes in the tax contingency reserve to investigate
whether managers’ made opportunistic reporting decisions prior to the FIN 48 adoption. FIN 48
required firms to increase (decrease) retained earnings to the extent the FIN 48 adoption
decreased (increased) their tax contingency reserve. Blouin et al. (2009) examine the 2005 and
2006 tax footnote disclosures in 10-Qs and 10-Ks for the 100 largest firms with analyst
following, excluding utilities and financial institutions. They find evidence that firms lowered
their reserves and had more tax audit settlements in the third and fourth quarters of 2006 relative
3
In LMSB-04-0507-044, May 10, 2007, the LMSB Commission stated, “We have received a determination
from Counsel that FIN 48 Workpapers are Tax Accrual Workpapers (TAW), and they are therefore subject to our
current policy of restraint.”
3
to the same quarters of 2005. Consistent with their results, we hypothesize that firms with
relatively large positive changes in their tax contingency reserve in 2005 reserved a lower
proportion of their potential tax contingencies in 2006, the year prior to the FIN 48 adoption. By
contrast, we predict that firms with relatively small changes in their tax reserve in 2005 had no
change in their tax reporting behavior in 2006 and wait until 2007 to record an increase in the
reserve as a decrease to retained earnings in the FIN 48 adoption year.
Our results do not support the hypothesis that firms that reserved a high proportion of
their unrecognized tax benefits in 2005 reserved a lower proportion such benefits in 2006. We
also find no support for the hypothesis that firms that reserved a low proportion of their
unrecognized tax benefits in 2005 had no change in the proportion of unrecognized tax benefits
in 2006, the year before adopting FIN 48.
Our results contribute to the growing literature addressing the behavioral effects of
adopting FIN 48 (e.g., Blouin, Gleason, Mills, and Sikes, 2007, 2009). Like Gupta, Mills, and
Towery (2009), our study provides an empirical test of recent theory concerning the effects of
new financial reporting disclosures on tax reporting. Our results provide some insight that large,
public multinational firms consider the relative aggressiveness of jurisdictions’ tax authorities in
their decisions to engage in tax-reducing behavior when subject to FIN 48.
This study proceeds as follows. We develop our hypotheses in section II, and present the
research design and sample selection in sections III and IV. We present the results in section V,
and conclude in section VI.
II. HYPOTHESES
The heightened focus on the financial reporting of corporate income tax expense began
with Sarbanes-Oxley Act of 2002. Under Section 404, the tax process had to be documented and
4
subjected to internal controls. Subsequently, the SEC noticed that firms followed a variety of
methods to determine the tax contingency reserve, which is the difference between income tax
expense on the income statement and the tax liability reflected on the corporate income tax
returns. On December 11, 2003, at the AICPA Conference on SEC Developments, Randolph
Green, a SEC Professional Accounting Fellow, expressed concern regarding the recognition of
tax benefits with respect to tax advantaged transactions.4
For example, assume a company enters into a tax-advantaged transaction that
results in a $100 permanent difference. Further, the tax opinion received by the
company states that the deduction is probable of being sustained. In that situation,
it is likely that the company would conclude that the $100 deduction is probable
and a reduction in the current payable would be appropriate. In contrast, if the tax
opinion received by the company indicated that it was something less than
probable that the benefit would be sustained, absent other evidence, I do not
understand why it would be appropriate to recognize the benefit as a reduction in
income tax expense.
On March 3, 2004, members of the FASB staff, representatives of the SEC's Office of the
Chief Accountant, and representatives of major public accounting firms met to discuss practice
issues related to uncertain tax positions. The participants found that significant diversity in
practice existed.5 On July 14, 2005, the FASB issued an exposure draft, “Proposed
Interpretation, Accounting for Uncertain Tax Positions, an interpretation of FASB Statement No.
109.”6 In response to the exposure draft, corporations expressed their concern that FIN 48
disclosures would be a “roadmap” of potential audit adjustments to the tax authorities. The
FASB concluded, however, that aggregated disclosures would not reveal information about
individual tax positions (FIN 48, ¶B64). The FASB also received comments criticizing the
complexity involved in implementing FIN 48. Firms expressed concern over the time and
4
U.S. Securities and Exchange Commission (SEC). Speech by SEC Staff: 2003 Thirty-First AICPA National
Conference on Current SEC Developments. http://www.sec.gov/news/speech/spch121103rpg.htm
5
Financial Accounting Standards Board (FASB). Financial Accounting Standards Advisory Council.
http://www.fasb.org/fasac/it_uncertain_tax_positions_09-23-04.pdf
6
FASB Exposure Draft No. 1215-001, Accounting for Uncertain Tax Positions – An Interpretation of FASB
Statement No. 109 (July 14, 2005) http://www.fasb.org/draft/ed_prop_interp_utp.pdf
5
resources that would need to be devoted to complying with FIN 48. FASB subsequently released
FIN 48 on July 13, 2006, with a date of June 2006. FIN 48 was effective for fiscal years
beginning after December 15, 2006, for public companies. Thus calendar-year-end public firms
were the first to file Form 10-Qs subject to the FIN 48 reporting requirements.
While the SEC and FASB were concerned with the financial reporting of tax expense, the
IRS was concerned with the tax reporting of income tax expense. In his testimony before the
Senate Finance Committee, former IRS Commissioner Mark Everson described corporations
with assets over $10 million as ‘‘sophisticated, well-capitalized, well-organized, and adept at
planning. Particularly in the case of public companies, they are driven to show high after-tax
profitability to shareholders in a very competitive and complex economic environment. They
have the resources and willingness to aggressively defend and contest tax positions” (IRS, 2006).
As expected, the IRS took notice of FIN 48, noting that examining agents “should not be
reluctant to pursue matters mentioned in FIN 48 disclosures” (IRS 2007), potentially making it
less likely that firms would engage in tax-reducing activities that would have to be disclosed,
albeit on an aggregate basis, in their 2007 financial statement footnotes. In addition, firms
potentially spent time and other resources to comply with the FIN 48 recognition and
measurement standards rather than devoting those resources to tax planning. Consistent with
these argumetnts, our first hypothesis is:
H1: Firms decrease their tax-reducing behavior when they begin accounting for and
disclosing unrecognized tax benefits under FIN 48.
Multinational firms are likely to have uncertain tax positions in multiple jurisdictions.
Because FIN 48 does not require firms to disclose UTBs on a jurisdiction-by-jurisdiction basis,
U.S. multinationals’ FIN 48 disclosures provide a less useful “roadmap” of uncertain tax
positions to the IRS relative to corporations operating only in the U.S. On the other hand, while
the IRS has shown restraint in its requests for audit tax workpapers, foreign taxing authorities
6
have been more aggressive (Smiley and Lynn 2007). Accordingly, firms operating in foreign
jurisdictions may decrease their tax-reducing activities to avoid documenting uncertain tax
positions in their workpapers. Given these competing considerations, our second hypothesis is
stated in the null:
H2: The presence of foreign operations has no effect on tax-reporting behavior when
firms begin accounting for and disclosing uncertain tax benefits under FIN 48.
When adopting FIN 48, firms recorded increases (decreases) in their contingency
reserves for unrecognized tax benefits as a decrease (increase) in retained earnings as of the
beginning of the year of adoption, e.g., January 1, 2007 for calendar year firms. As a result,
calendar year firms that anticipated decreasing their reserves (i.e., book-tax reporting) when
adopting FIN 48 had an incentive to reduce tax expense in 2006, the year prior to the FIN 48
adoption whereas firms anticipating an increase in tax reserves had an incentive to wait until
2007 to increase such reserves. Following Blouin et al. (2009) we expect that firms with a large
change in their tax reserves in 2005 decreased the proportion of their potential unrecognized tax
benefits added to the tax reserves in 2006. By contrast, we expect that firms with low changes to
their tax reserves in 2005 did not increase the proportion of their potential unrecognized tax
benefits reserved for in 2006. Our hypotheses are as follows:
H3a: Firms that reserved a high proportion of their potential unrecognized tax benefits in
2005 reserved a lower proportion of potential unrecognized tax benefits in 2006,
the year before adopting FIN 48.
H3b: Firms that reserved a low proportion of their potential unrecognized tax benefits in
2005 had no change in the proportion of potential unrecognized tax benefits in
2006, the year before adopting FIN 48.
7
III. RESEARCH DESIGN
We estimate the following cross-sectional model to test our hypotheses that the FIN 48
disclosure requirements led public firms to engage in less tax reducing behavior (H1), and that
this effect is either mitigated or amplified to the extent firms have foreign operations (H2):
PDCNFi = α0 + α1LAG_PDCNFi + α2PUBLICi + α3PUBLICi*LAG_PDCNFi
+ α4FOREIGNi + α5FOREIGNi*PUBLICi + α6FOREIGNi*LAG_PDCNFi
+ α7FOREIGNi*PUBLICi*LAG_PDCNFi + ∑γj*INDUSTRYii + δ*AUDITi + εi (1)
where
PDCNFi = Firm i’s permanent book-tax differences less grossed-up tax credits
in the year FIN 48 was adopted scaled by yearend 2005 total assets;
LAG_PDCNFi = Firm i’s PDCNF in the year prior to adopting FIN 48;
PUBLICi = Binary variable equal to one if firm i is a public corporation and
zero otherwise;
FOREIGNi = Binary variable equal to one if firm i has foreign operations; 0
otherwise.
INDUSTRYij = Binary variable equal to one if the firm is a member of 2-digit
NAICS industy j, and zero otherwise;
AUDITi = The likelihood of the firm being audited, based on its asset size and
2005 IRS audit rates.
We use PDCNF to proxy for a firm’s tax reporting behavior. Consistent with the
argument that the most valuable tax planning strategies create permanent tax savings, this
measure does not reflect tax deferral strategies and focuses on tax reduction that is permanent in
nature. This measure also excludes the confounding effect of changes in the deferred tax asset
valuation allowance and the foreign tax rate differentials, both of which affect the effective tax
rate but have no effect on tax-reporting behavior.
Table 1 provides the variable definitions and the tax return line item of the underlying
data items used to create the variables. We scale our variables by ASSETS, which is reported on
Form 1120, Sch. L, line 15(d). To compute PDCNF, we use the following variables from the
Sch. M-3: PID the permanent differences from income items reported on Sch. M-3, Part 2, line
8
26(c) and SEC-78 is the Section 78 gross-up for foreign taxes associated with the repatriation of
foreign earnings and reported on Sch. M-3, Part 2, line 4(c). We subtract SEC-78 from PID to
compute PIDNF because this permanent income difference is mechanical and is offset by an
increased foreign tax credit. Next, we compute PRE-TAX- PED, as PED, the permanent expense
difference reported Sch. M-3, Part 2, line 27(c) with the sign reversed, plus the sum of current
and foreign permanent expense differences reported on Sch. M-3, part 3, lines 1 (c), 2 (c), 5 (c)
and 6 (c).7 If PED is negative, firms reduced book income to arrive at taxable income. Total
permanent differences, PDNF, are the sum of PIDNF and PRE-TAX PED. We then compute
OTHCRED as total credits (Form 1120, page 3, Schedule J, line 6) less FTC, the foreign tax
credit (Form 1120, page 3, Schedule 6a), grossed-up by the statutory tax rate, 35 percent. Finally,
we compute PDCNF as PDNF less OTHCRED. Because OTHCRED is a positive number
(credits are reported as positive numbers in the database), we subtract to create the total effect of
PDNF and OTHCRED. Based on this construction, if PDCNF is greater than zero, the firm’s
book income is less than taxable income; if PDCNF is less than or equal to zero, book income
may still be less than taxable income, but the credits offset positive permanent differences,
making the term negative. Comparing PDCNF to LAG_PDCNF, positive or less negative values
of PDCNF indicate a firm is engaging in less tax-reducing behavior; i.e., generating fewer
credits and/or more (less) income increasing (decreasing) permanent book-tax differences.
LAG_PDCNF represents the 2006 scaled permanent differences and credits. The
coefficient on LAG_PDCNF (α1) captures the relation between pre- and post-adoption tax
reporting behavior common to all firms. PUBLIC is equal to one if the firm’s stock is publicly
traded and captures the shift in intercept due to publicly-traded status. Next, we include the
7
Although the Sch. M-3 distinguishes between temporary and permanent differences related to book federal
income tax expense, the distinction is meaningless. Firms typically report the income tax expense as permanent, but
in any event, the entire federal income tax expense is a book-tax difference.
9
interaction between PUBLIC and LAG_PDCNF in the model to measure the incremental change
in the relation between pre- and post-permanent differences associated with publicly held firms
that have no foreign operations. We next include a binary variable, FOREIGN, which takes one a
value of one if the firm reports any income or loss from foreign operations, and interact it with
PUBLIC, LAG_PDCNF, and PUBLIC*LAG_PDCNF.
H1 predicts a positive change in the relation between PDCNF and LAG_PDCNF
associated with the firm being public versus private. Expected signs consistent with H1 can be
computed as follows:
∂PDCNF/ ∂PUBLIC = α2 + α3LAG_PDCNF + α5FOREIGN
+ α7FOREIGNxLAG_PDCNF.
(2)
H1 is supported when ∂PDCNF/ ∂PUBLIC is positive, which depends on the sign of LAG_PDCNF.
When LAG_PDCNF is greater than zero, H1 is supported when the combination of α3 and α7 is
positive. When LAG_PDCNF is lesser than or equal to zero, H1 is supported when the combination
of α3 and α7 is negative. Similarly, multinationals are relatively more (less) conservative than
domestic firms when LAG_PDNCF and α7 have the same (opposite) signs.
In addition to firm-specific variables we include two additional sets of variables in
equation (1) to address industry demographics. First, we include binary variables for each 2digit North American Industry Classification System (NAICS) code to control for industry
differences. Second, we include a control for the likelihood of the firm being audited, based on
the firm’s asset size and the 2005 audit rates reported in the IRS Data Book (Internal Revenue
Service, 2006). We use the 2005 audit rates because they are the most recently available
information at the time firms would have been determining their tax positions.
To test our third hypothesis, we estimate the following model using OLS and restricting
the sample to domestic-only corporations:
10
2006ΔRESERVE%i = β0 + β12005ΔRESERVE%i + β2HIGHi
+ β32005ΔRESERVE%i*HIGHi + β4PUBLICi
+ β52005ΔRESERVE%i*PUBLICi + β6HIGHi*PUBLICi
+ β72005ΔRESERVE%i*HIGH*PUBLICi
+ μi
(3)
where
ΔRESERVE%i = Firm i’s change in tax reserves/PDCNF
HIGHi = An indicator variable equal to one if firm i’s 2005CHRESERVE is
above the median and zero otherwise.
and all other variables are as previously defined. In addition, ΔRESERVE%i is computed
separately for 2005 (2005ΔRESERVE%i) and 2006 (2006ΔRESERVE%i).
We compute ΔRESERVE% as ΔRESERVE scaled by PDCNF. We measure ΔRESERVE as
CURR-FEDTAX – TOTFEDTAX, where CURR-FEDTAX is federal current tax expense reported
on Sch. M-3, Part 3, line 1(a), and TOTFEDTAX is the income tax liability reported on Form
1120, P3, Sch. J, line 10; i.e, ΔRESERVE is the difference between current tax expense reported
on the income statement and the tax liability reported on the tax returns. We restrict our sample
to domestic-only corporations for this test because we only have data to compute federal current
tax expense and tax liability. Scaling the change in the current year change in the tax reserve by
PDCNF thus captures the extent to which a firm has tax reserves relative to its potential
unrecognized tax benefits. All else equal, firms with higher (lower) values of ΔRESERVE% are
reserving a greater (lesser) proportion of the benefits associated with their uncertain tax positions
relating to permanent differences and credits.
We next include PUBLIC and, consistent with the incentive for firms with high reserves
(HIGH equals one when 2005ΔRESERVE% is above the industry median) to have less additions
to their tax reserves in the year prior to adopting FIN 48 (H3a) we expect the coefficient on the
11
three-way interaction between 2005ΔRESERVE%, HIGH, and PUBLIC, β7, to be negative. By
contrast, we do not expect firms with low reserves in prior years to change their reporting
behavior (H3b). Accordingly, we expect the coefficient on 2005ΔRESERVE%*PUBLIC, β3, to
not be significantly different than zero.
IV. SAMPLE SELECTION
A. Data Source
Our sample is drawn from the Internal Revenue Service’s Statistic’s of Income (SOI)
corporation files, containing tax return information from the Form 1120 series of returns for
more than 100,000 corporations annually, both public and private.8 Tax return data are recorded
as filed, and validated for reporting accuracy, but do not reflect any subsequent amendments or
audit adjustments.
We utilize information from the Form 1120, Schedule M-3, which provides a detailed
reconciliation of firms’ financial statements and their tax reporting. The M-3 is required for any
firm with total assets of $10 million or more, and replaced the Schedule M-1, which provided
only a minimal reconciliation. The key advantage of the M-3 in our research setting is the
requirement that the firm first reconciles the income reported to shareholders to the taxable entity
represented in the return, and then further details the differences between the amount an item is
reported on the 10-K and the amount that is reported on the tax return. This detailed
reconciliation includes the separation of a difference into its permanent and temporary
components.9
8
For more information on the sampling used by SOI see U.S. Internal Revenue Service, 1999, Statistics of
Income - 1996: Corporation Income Tax Returns, (Publication 16) (Washington D.C.: US GPO).
9
For more information on the shortcomings of the M-1, and the development of the M-3 see Mills and Plesko
(2003), Hanlon (2003), and Boynton, et al (2004).
12
After deleting firms with assets of less than $10 million (which are not required to file the
Schedule M-3), our initial sample included 128,409 firm-year observations for the years 20052007. We also delete part-year returns and returns with non-calendar year-ends to match the
reporting to the implementation of FIN 48, reducing the sample to 97,625 firm-year
observations. Next, we test elements of the M-3 for reporting consistency and delete
observations with inconsistent M-3 entries. These entries include returns with inconsistent signs
within an individual line, inconsistencies in sign across reconciling items, or returns in which the
M-3 income reconciliation total is more than ten percent different from the income amount
reported on the Form 1120.10 Deleting firm-years with inconsistent data reduces our sample to
63,123 firm years. To create our balanced panel, we delete observations that do not have data for
all three years, leaving us with 33,627 firm-year observations: 11,209 annual observations, of
which 2,121 file a 10-K with the Securities and Exchange Commission and 9,088 that do not.
B. Descriptive Statistics
Summary statistics for the sample used to test Hypotheses 1 and 2 are reported in Table
2. Panel A contains the descriptive statistics for the full sample for 2006 and 2007. Interestingly,
average assets increased from $861.9 million to $929.7 million, but pre-tax book decreased.
Also, mean book-tax differences, computed by subtracting tax net income (TNI) from pre-tax
book income (PTBI) are lower in 2006 (approximately negative $2.8 million) than in 2007
(approximately $.3 million), suggesting that firms engaged in less tax-reducing behavior in 2007
than in 2006. Most of this difference, however, is due to an increase in temporary book-tax
differences and does not affect our measure of tax-reducing behavior. Indeed, the sum of
10
We note that some firms adopt a sign convention in the M-3 different from what might be expected, namely
that all expense reconciliation items are treated as negative. If these schedules are otherwise internally consistent
but for the sign, we reverse the signs and retain the observation.
13
permanent differences and grossed- up other credits, unscaled PDCNF, remains approximately
the same from 2006 to 2007.
Panel B separately reports descriptive statistics for firms with positive and negative
LAG_PDCNF. Firms that engaged in more tax-reducing behavior in 2006 (LAG_PDCNF less
than or equal to zero) are larger (mean ASSETS of $1,284 million versus $495.2 million) and
have a higher proportion of publicly-traded firms (.209 versus .165). Moreover, firms that
engaged in more (less) tax-reducing behavior in 2006 continued to do so in 2007. The mean
unscaled PDCNF is $(4.06 million) for the LAG_PDCNF lesser than or equal to zero subsample
and is $2.58 million for the LAG_PDCNF greater than zero subsample. Note that the means for
permanent differences do not equal the unscaled PDCNF means because the latter measure
excludes the Section 78 gross-up for dividends from foreign corporations.
Table 2, Panel C, presents means for all variables condition on whether the firm is
privately-held versus publicly-traded. As expected, public firms are larger than private firms,
have lower permanent book-tax differences, and a greater proportion of firms with foreign
operations. Public firms also engage in more tax-reducing behavior. The mean scaled PDCNF is
$(300,000) for the public firms and only $(100,000) for the private firms. Panel D of Table 2
compares firms with foreign operations to firms that have only domestic operations.
Interestingly, the multinationals and domestic-only firms have approximately the same mean
amount of permanent book-tax differences, but have a large difference in temporary differences,
$(5.3 million) for the multinationals and $1.7 million for the domestic-only firms.
C. Correlations
Table 3 reports the correlations between the variables used to test hypotheses 1 and 2. As
expected, taxable income (TI) and tax net income (TNI) are highly correlated. No other
correlations are very high.
14
V. RESULTS
A. Main Results
The results from estimating equation (1) for the full and large firm samples are reported
in Table 4, Panels A and B, respectively. We present separate results based on the sign of
LAG_PDCNF because the signs on the coefficients have different interpretations for the two
subsamples. In Panel A, when LAG_PDCNF is positive, the coefficient on LAG_PDCNF, α1, is
0.033 and statistically significant (p = 0.000). The coefficient on PUBLIC*LAG_PDCNF, α3, is
significant and negative (coefficient estimate -0.024; p = 0.069). Next, the coefficient on
FOREIGN*PUBLIC*LAG_PDCNF, α7, which captures the incremental effect of being a public
firm with foreign operations, is 0.035 but is statistically insignificant (p = 0.153). In a F-test, the
combination of α3 and α7 is not significantly different than zero (p =0.409). These results fail to
support both H1 and H2.
The second column in Table 4, Panel A, presents the results of estimating equation (1)
when LAG_PDCNF is less than or equal to zero. The combination of α3 and α7 is significantly
different than zero (p = 0.000), but with a sign opposite of that predicted by H1.
The coefficient on FOREIGN*PUBLIC*LAG_PDCNF, α7, is significant and positive (coefficient
estimate = 0.132; p = 0.000), consistent with public multinational corporations engaging in more
tax-reducing behavior in 2007 than domestic-only firms. These results do not support the null
hypothesis of no difference in tax-reducing behavior for public multinational firms (H2).
Next, the results from estimating equation (1) only for large firms (ASSETS greater than
$250 million) are reported in Table 4, Panel B. When LAG_PDCNF is greater than zero, the sum
of the coefficients on PUBLIC*LAG_PDCNF and FOREIGN*PUBLIC*LAG_PDCNF is
significantly different than zero (p=0.000), but the sign is opposite than that expected, and thus
inconsistent with H1. The coefficient on the FOREIGN*PUBLIC*LAG_PDCNF three-way
15
interaction is negative and significant (p=0.000), consistent with large multinational firms
engaging in greater tax-reducing behavior than their domestic-only counterparts. When
LAG_PDCNF is zero or negative, the coefficient on PUBLIC*LAG_PDCNF is 0.639 and
significant (p=0.000) and the coefficient on FOREIGN*PUBLIC*LAG_PDCNF is not
significantly different than zero. The combination of α3 and α7 is statistically significant
(p=0.000), but is in the opposite direction than predicted by H1. These results fail to support both
H1 and H2.
Table 5, Panels A and B, presents the results from separately estimating equation (1) for
firms based on whether they are taxable or nontaxable, respectively, which is determined by
whether the firm reported positive federal income tax (before credits and other taxes) on Form
1120. In Panel A when LAG_PDCNF is greater than zero for the taxable firms, we find no
support for either H1 or H2; i.e., neither the combination of α3 and α7 (H1) or α7 alone (H2) is
statistically significant. When LAG_PDCNF is zero or negative, the combination of α3 and α7 is
negative and statistically significant (p=0.037), consistent with H1. The coefficient on
FOREIGN*PUBLIC*LAG_PDCNF, α7, is negative and statistically significant, consistent with
taxable publicly-held multinationals engaging in incrementally less tax-reducing behavior.
The results reported in the first column of Table 5, Panel B indicate that for nontaxable
firms with LAG_PDCNF greater than zero, the combination of α3 and α7 is not significantly
different than zero; α7 is -0.744 and statistically significant (p=0.000), however, consistent with
nontaxable publicly-held multinationals engaging in incrementally more tax-reducing behavior
than their domestic-only firms. When LAG_PDCNF is lesser than or equal to zero, the
combination of α3 and α7 is positive, and though it is statistically significant (p=0.076), its sign is
inconsistent with H1. The estimate of α7 is not significantly different than zero. Accordingly, for
these firms, neither H1 or H2 are supported.
16
We next present the results of estimating equation (1) for large firms only. Table 6, Panel
A presents the results for the sub-sample of taxable large firms. When LAG_PDCNF is greater
than zero neither the combination of α3 and α7 (H1) or α7 alone (H2) is statistically significant,
thus neither H1 nor H2 is supported. When LAG_PDCNF is zero or negative, the combination of
α3 and α7 is negative and statistically significant (p=0.003), consistent with H1. The coefficient
on FOREIGN*PUBLIC*LAG_PDCNF, α7, is negative and statistically significant, consistent
with large taxable publicly-held multinationals engaging in incrementally less tax-reducing
behavior. In Panel B of Table 6, the results of estimating equation (1) when LAG_PDCNF is
greater than zero suggest that large nontaxable publicly-traded multinational firms engage in
more tax reducing behavior than their domestic-only and private counterparts. There is no
evidence to suggest that large nontaxable public firms engaged in less tax-reducing behavior in
response to adopting FIN 48. Similarly, when LAG_PDCNF is zero or negative, the results
indicate that large nontaxable public firms with foreign operations engaged in relatively more
tax-reducing behavior in 2007 than in 2006 (α7 greater than zero), but that large nontaxable
public firms engaged in more tax-reducing behavior (p=0.000) than large nontaxable private
firms.
Taken together, we find only modest evidence supporting the hypothesis that firms
decreased their tax-reducing behavior in response to FIN48’s new disclosure requirements (H1).
Support for this hypothesis is limited to the estimated behavior of publicly-traded multinational
corporations, with taxable multinationals becoming more conservative in 2007. Strangely,
nontaxable multinationals generally engage in more tax-reducing behavior in 2007 than in 2006.
17
B. H3 Results
Summary statistics for the sample used to test hypotheses 3a and 3b are reported in Table
7, followed by the regression results in Table 8. We estimate equation (3) separately for all
domestic-only firms and for large domestic-only firms. We find no support for the hypothesis
that firms altered their reserve behavior in anticipation of FIN48. In both specifications, for the
entire sample, public firms with high estimated cushion amounts do not reserve relatively less of
their estimated unrecognized tax benefits in 2006 relative to their estimated addition to the
reserve in 2005.
VI. CONCLUSION
We investigate whether firms subject to the new accounting and disclosure requirements
of FIN 48 altered their tax reporting behavior. Overall, we find little evidence that public firms
became more conservative when subject to the FIN 48 disclosure requirements, with the
exception that large public multinational firms appear to have reduced their tax-reducing
behavior. This evidence, however, is counterintuitive: the taxable large public multinationals
decreased their tax-reducing behavior whereas the large nontaxable multinationals appear to
have increasing their tax-reducing behavior.
This study is very preliminary in nature, with future work focusing on measurement
issues. Our current measure of tax-reducing behavior, all permanent differences and credits
except for those relating to the foreign tax credits, may be able to be refined so that we can
implement a more powerful test of the alternative hypothesis that publicly-traded firms engaged
in less tax-reducing behavior after adopting FIN 48. Accordingly, we plan to model and estimate
unexpected permanent differences and credits, and to address whether our results are being
affected by the choice of scaling. Because the evidence suggests that tax-reducing behavior is
more prevalent among larger public firms, scaling by assets may not be appropriate.
18
REFERENCES
Blouin, J., Gleason, C., Mills, L., Sikes, S. 2007. What can we learn about uncertain tax
benefits from FIN 48? National Tax Journal, 60 (3), 521-35.
Blouin, J., Gleason, C., Mills, L., Sikes, S. 2009. Reporting in advance of FIN 48 adoption.
University of Pennsylvania and University of Texas at Austin working paper.
Beck, P. and Jung, W. 1989. Taxpayers reporting decisions and auditing under information
asymmetry. The Accounting Review, 64 (3), 468-487.
Boynton, C.E., P. DeFilippes, P. Lisowsky, and E. Legel. 2008. A First Look at 2005
Schedule M-3 Corporate Reporting. Tax Notes (November 3).
Boynton, C.E., P. DeFilippes, P. Lisowsky, and E. Legel. 2006. A First Look at 2004
Schedule M-3 Reporting by Large Corporations. Tax Notes (September 11).
Boynton, C.E., P. DeFilippes, P. Lisowsky, and L Mills. 2004. Consolidation Anomalies
Suggest Cautious Interpretation of Schedule M-1 Book-Tax Differences and Schedule L
Balance Sheets. Tax Notes (July 26).
Gupta, S., L. Mills, and E. Towery. 2009. Did FIN 48 Arrest the Trend in Multistate Tax
Avoidance? Working paper, University of Texas at Austin
Hanlon, M. 2003. What Can We Infer About A Firm's Taxable Income From Its Financial
Statements? National Tax Journal 56:4 (December), 831-864.
Internal Revenue Service, 2006, Corporation Income Tax Returns, 2005 (publication 16)
(U.S. Government Printing Office).
Internal Revenue Service, 2006, Data Book 2005 (publication 55B) (U.S. Government
Printing Office).
Lynn, B. R., and S. Smiley. 2007. The practical impact of FIN 48 - Is it moving abroad?
Corporate Taxation, Nov/Dec, 34-39.
Mills, L.F. 1998. Book-tax differences and Internal Revenue Service Adjustments. Journal
of Accounting Research, 36: 343 - 356.
Mills, L.F., L A. Robinson, and R.C. Sansing. 2009. FIN 48 and Tax Compliance, working
paper, University of Texas at Austin and Dartmouth.
Mills, L.F., and G.A. Plesko. 2003. Bridging the reporting gap: a proposal for more
informative reconciling of book and tax income, National Tax Journal 56:4 (December),
865 - 893.
Plesko, G.A. 2002, Reconciling corporation book and taxable net income, tax years 1996 1998, (Spring) SOI Bulletin (U.S. Government Printing Office), 111 - 132.
19
Plesko, G.A. 2003, An evaluation of alternative measures of corporate tax rates. Journal of
Accounting and Economics 35:2, 201-226.
Plesko, G.A. 2007. Estimates of the Magnitude of Financial and Tax Reporting Conflicts.
NBER Working Paper No. W13295
20
TABLE 1
Variable Definitions and Source
Variable
ASSETS
TNI
TI
FEDTAX
TAXABLE
PDNF
PIDNF
PID
SEC-78
PRE-TAX-PED
PED
FEDTAX-CURR-PED
FEDTAX-DFRD-PED
FRNTAX-CURR-PED
FRNTAX-DFRD-PED
OTHCRED
TOTCRED
FTC
PDCNFNF
OTHCRED_assets
PDCNFNF_assets
PUBLIC
PUBLIC-STOCK
F10K
FOREIGN
DOMESTIC
FNI
FNL
CHRESERVE%
CURR-FEDTAX
TOTFEDTAX
HIGH
AUDIT
Definition
Total Assets
Tax Net Income (TI Before Net Operating Loss Deduction and
Special Deductions)
Taxable Income
Federal Income Tax Per Tax Return (before credits and other taxes)
1 if FEDTAX > 0
(PIDNF + PRE-TAX-PED)
PID -SEC-78
Permanent Income Difference
Section 78 Gross-up
PED + FEDTAX-CURR-PED + FEDTAX-DFRD-PED
+ FRNTAX-CURR-PED + FRNTAX-DFRD-PED
Permanent Expense Difference (reverse sign of Sch. M-3, Part 3)
U.S. Current Income Tax - Permanent Expense Difference
U.S. Deferred Income Tax - Permanent Expense Difference
Foreign Current Income Tax - Permanent Expense Difference
Foreign Deferred Income Tax - Permanent Expense Difference
(TOTCRED - FTC)/.35
Total Credits
Foreign Tax Credit
PDNF - OTHCRED
OTHCRED/Assets
PDCNFNF/Assets
1 PUBLIC-STOCK=1 & F10K=1
Public Stock Indicator
Form 10K Income Indicator
1 if DOMESTIC = 0
1 if FNI = 0 & FNL = 0
Foreign Net Income
Foreign Net Loss
(CURR-FEDTAX - TOTFEDTAX)/PDCNFNF
Current Federal Income Tax Per Financial Statements
Total Tax Settlement
1 if CHRESERVE& > Median (2005_CHRESERVE%)
Audit probability based on firm’s asset size and 2005 IRS
audit rates
21
Form 1120 Line
Sch. L, 15 (d)
P1, 28
P1, 30
P3, Sch. J, 2
Sch. M-3, Part 2, 26(c)
Sch. M-3, Part 2, 4(c)
Sch. M-3, Part 2, 27(c)
Sch. M-3, Part 3, 1(c)
Sch. M-3, Part 3, 2(c)
Sch. M-3, Part 3, 5(c)
Sch. M-3, Part 3, 6(c)
P3, Schedule J, 6
P3, Schedule J, 6a
Sch. M-3, Part 1, 3a
Sch. M-3, Part 1, 1a
Sch. M-3, Part 1, 5a
Sch. M-3, Part 1, 5b
Sch. M-3, Part 3, 1(a)
P3, Sch. J, 10
IRS Data Book, 2006
TABLE 2
Summary Statistics
('000,000)
N = 11,209
Panel A: All data
ASSETS
PTBI
Temporary Differences
Permanent Differences
TNI
TI
PDNF (unscaled)
OTHCRED (unscaled)
PDCNF (unscaled)
PDNF (scaled)
OTHCRED (scaled)
PDCNF (scaled)
LAG_PDCNF (scaled)
TAXABLE
PUBLIC
FOREIGN
FOREIGN*PUBLIC
Mean
929.667
21.445
0.701
-0.380
21.764
24.122
-1.078
1.188
-2.266
0.000
0.001
-0.001
-0.001
0.610
0.189
0.145
0.074
Panel B: 2007 LAG_PDCNF
ASSETS
PTBI
Temporary Differences
Permanent Differences
TNI
TI
PDNF (unscaled)
OTHCRED (unscaled)
PDCNF (unscaled)
PDNF (scaled)
OTHCRED (scaled)
PDCNF (scaled)
LAG_PDCNF (scaled)
TAXABLE
PUBLIC
FOREIGN
FOREIGN*PUBLIC
Std. Err.
100.486
1.980
1.750
0.663
2.356
1.966
0.565
0.219
0.646
0.000
0.000
0.000
0.000
0.005
0.004
0.003
0.002
>0
N=5,037
Mean
495.196
8.871
0.842
3.422
13.118
14.755
2.579
0.438
2.141
0.005
0.001
0.004
0.012
0.454
0.165
0.169
0.075
22
Std. Err.
56.911
2.018
0.785
1.164
2.500
2.348
0.873
0.086
0.873
0.000
0.000
0.000
0.001
0.007
0.005
0.005
0.004
Mean
Std. Err.
861.932
103.299
24.612
2.832
-2.219
2.439
-0.599
0.375
21.803
2.079
22.129
1.946
-1.150
0.338
1.098
0.182
-2.247
0.399
0.000
0.000
0.001
0.000
-0.001
0.000
-0.006
0.006
0.628
0.005
0.190
0.004
0.143
0.003
0.074
0.002
<=0
N=6,172
Mean
Std. Err.
1,284.241
176.363
31.706
3.191
0.585
3.113
-3.482
0.738
28.819
3.759
31.766
3.009
-4.062
0.737
1.800
0.391
-5.862
0.929
-0.004
0.000
0.002
0.000
-0.006
0.000
-0.012
0.001
0.737
0.006
0.209
0.005
0.124
0.004
0.073
0.003
TABLE 2 (cont'd)
Panel C:
Public
Private
N = 2,121
N = 9,088
Mean
2,608.029
75.302
2.101
-2.242
75.139
78.317
-4.928
5.101
-10.028
-0.001
0.002
-0.003
0.000
0.570
1.000
0.392
0.392
ASSETS
PTBI
Temporary Differences
Permanent Differences
TNI
TI
PDNF (unscaled)
OTHCRED (unscaled)
PDCNF (unscaled)
PDNF (scaled)
OTHCRED (scaled)
PDCNF (scaled)
LAG_PDCNF (scaled)
TAXABLE
PUBLIC
FOREIGN
FOREIGN*PUBLIC
Panel D:
23
Mean
537.963
8.875
0.374
0.055
9.307
11.473
-0.180
0.275
-0.454
0.000
0.001
-0.001
-0.002
0.619
0.000
0.087
0.000
Std. Err.
77.897
1.102
1.392
0.363
2.025
1.360
0.334
0.034
0.330
0.000
0.000
0.000
0.000
0.005
0.000
0.003
0.000
Foreign
Domestic
N=1,620
N=9,589
Mean
2,392.917
92.117
-5.329
-0.354
86.384
93.507
-4.610
5.022
-9.632
0.001
0.003
-0.002
0.000
0.501
0.513
1.000
0.513
ASSETS
PTBI
Temporary Differences
Permanent Differences
TNI
TI
PDNF (unscaled)
OTHCRED (unscaled)
PDCNF (unscaled)
PDNF (scaled)
OTHCRED (scaled)
PDCNF (scaled)
LAG_PDCNF (scaled)
TAXABLE
PUBLIC
FOREIGN
FOREIGN*PUBLIC
Std. Err.
411.141
9.249
7.070
3.142
8.839
8.503
2.621
1.145
3.100
0.001
0.000
0.001
0.001
0.011
0.000
0.011
0.011
Std. Err.
378.652
11.238
8.491
4.144
14.692
11.892
3.375
1.146
3.774
0.001
0.000
0.001
0.002
0.012
0.012
0.000
0.012
Mean
682.460
9.505
1.719
-0.384
10.846
12.400
-0.481
0.540
-1.021
0.000
0.001
-0.001
-0.002
0.628
0.135
0.000
0.000
Std. Err.
98.303
1.285
1.459
0.334
1.158
1.071
0.333
0.167
0.403
0.000
0.000
0.000
0.000
0.005
0.003
0.000
0.000
TABLE 3
Correlations - 2007
Full Sample N = 11,209.
ASSETS
ASSETS
1.00
NI
TI
PDCNF
PDCNF/
ASSETS
LAG
PDCNF/
ASSETS
PUBLIC
NI
0.39
0.00
1.00
TI
0.53
0.00
0.85
0.00
1.00
-0.20
0.00
-0.06
0.00
-0.11
0.00
1.00
0.00
0.00
0.67
-0.01
0.32
-0.01
0.40
0.08
0.00
1.00
0.00
-0.01
0.43
-0.03
0.00
-0.03
0.01
0.04
0.00
-0.01
0.13
1.00
0.00
PUBLIC
0.08
0.00
0.10
0.00
0.13
0.00
-0.06
0.00
0.02
0.10
0.01
0.20
1.00
0.00
FOREIGN
0.06
0.00
0.11
0.00
0.14
0.00
-0.06
0.00
0.02
0.03
0.00
0.76
0.35
0.00
PDCNF
PDCNF/ASSETS
LAG_PDCNF/ASSETS
24
FOREIGN
1.00
0.00
TABLE 4
Results from Regressions
All Firms/All Large Firms
PDCNFi =a0 + 1LAG_PDCNFi + 2PUBLICi + 3PUBLICi*LAG_PDCNFi + FOREIGNi + FOREIGNi*PUBLICi
+ 6FOREIGNi*LAG_PDCNFi + a7FOREIGNi*PUBLICi*LAG_PDCNFi + a8AUDIT2005 + ei
Panel A: ALL FIRMS
LAG_PDCNF>0
LAG_PDCNF<=0
Intercept
LAG_PDC
PUBLIC
PUBLIC*LAG_PDC
FOREIGN
FOREIGN*PUBLIC
FOREIGN*LAG_PDC
FOREIGN*PUBLIC*LAG_PDC
AUDIT2005
Coefficient
0.004
0.033
0.003
-0.024
0.006
-0.007
-0.044
0.035
0.000
p-value
0.025
0.000
0.001
0.069
0.000
0.000
0.003
0.153
0.865
Coefficient
-0.006
0.025
0.002
0.221
-0.003
0.002
-0.068
0.132
-0.002
p-value
0.002
0.000
0.007
0.000
0.009
0.181
0.000
0.000
0.277
0.680
0.023
5037
0.409
176.200
0.091
6172
0.000
F statistic: a3 + a7 = 0
Adj R-squared
N
Panel B: ALL LARGE FIRMS
LAG_PDCNF>0
LAG_PDCNF<=0
Intercept
LAG_PDC
PUBLIC
PUBLIC*LAG_PDC
FOREIGN
FOREIGN*PUBLIC
FOREIGN*LAG_PDC
FOREIGN*PUBLIC*LAG_PDC
Coefficient
-0.005
-0.035
-0.002
0.081
0.000
0.001
0.565
-0.660
p-value
0.356
0.195
0.405
0.113
0.904
0.713
0.000
0.000
Coefficient
-0.012
0.019
0.005
0.639
-0.007
0.000
-0.285
-0.096
p-value
0.000
0.070
0.000
0.000
0.000
0.982
0.000
0.200
37.500
0.050
1047
0.000
112.570
0.182
2287
0.000
F statistic: a3 + a7 = 0
Adj R-squared
N
Truncated Sample (Top/Bottom 1% of LAG_PDCNF)
25
TABLE 5
Results from Regressions
Taxable vs Nontaxable Firms
PDCNFi =a0 + 1LAG_PDCNFi + 2PUBLICi + 3PUBLICi*LAG_PDCi + FOREIGNi + FOREIGNi*PUBLICi +
6FOREIGNi*LAG_PDCNFi + a7FOREIGNi*PUBLICi*LAG_PDCNFi + a8AUDIT2005 + ei
Panel A: TAXABLE FIRMS
Intercept
LAG_PDCNF
PUBLIC
PUBLIC*LAG_PDCNF
FOREIGN
FOREIGN*PUBLIC
FOREIGN*LAG_PDCNF
FOREIGN*PUBLIC*LAG_PDCNF
AUDIT2005
F statistic: a3 + a7 = 0
Adj R-squared
N
LAG_PDCNF>0
LAG_PDCNF<=0
Coefficient
0.003
0.069
0.009
-0.031
0.011
-0.021
0.126
-0.161
-0.014
p-value
0.824
0.253
0.423
0.802
0.260
0.246
0.476
0.539
0.535
Coefficient
-0.012
0.252
0.002
0.558
-0.001
-0.009
0.205
-0.635
0.006
p-value
0.017
0.000
0.216
0.000
0.760
0.036
0.010
0.000
0.170
0.680
-0.004
2325
0.409
0.800
0.132
4575
0.037
Panel B: NONTAXABLE FIRMS
LAG_PDCNF>0
Intercept
LAG_PDCNF
PUBLIC
PUBLIC*LAG_PDCNF
FOREIGN
FOREIGN*PUBLIC
FOREIGN*LAG_PDCNF
FOREIGN*PUBLIC*LAG_PDCNF
AUDIT2005
Coefficient
0.013
-0.710
-0.008
0.806
-0.009
0.012
0.687
-0.744
0.009
p-value
0.336
0.000
0.232
0.000
0.191
0.305
0.000
0.000
0.626
Coefficient
0.002
0.185
0.020
0.032
0.006
0.129
-0.208
1.651
-0.116
p-value
0.985
0.312
0.692
0.971
0.907
0.124
0.644
0.204
0.265
0.270
0.161
2854
0.608
3.160
-0.005
1711
0.076
F statistic: a3 + a7 = 0
Adj R-squared
N
26
LAG_PDCNF<=0
TABLE 6
Results from Regressions
Large Firms: Taxable vs Nontaxable
PDCNFi =a0 + 1LAG_PDCNFi + 2PUBLICi + 3PUBLICi*LAG_PDCNFi + FOREIGNi + FOREIGNi*PUBLICi
+ 6FOREIGNi*LAG_PDCNFi + a7FOREIGNi*PUBLICi*LAG_PDCNFi + a8AUDIT2005 + ei
Panel A: LARGE TAXABLE FIRMS
Intercept
LAG_PDCNF
PUBLIC
PUBLIC*LAG_PDCNF
FOREIGN
FOREIGN*PUBLIC
FOREIGN*LAG_PDCNF
FOREIGN*PUBLIC*LAG_PDCNF
F statistic: a3 + a7 = 0
Adj R-squared
N
LAG_PDNFC>0
LAG_PDCNF<=0
Coefficient
-0.019
-0.064
0.020
0.245
0.003
-0.004
1.818
-2.053
p-value
0.784
0.833
0.503
0.682
0.937
0.928
0.100
0.104
Coefficient
0.003
0.269
0.004
0.782
0.004
-0.019
0.604
-1.255
p-value
0.733
0.000
0.166
0.000
0.499
0.007
0.000
0.000
2.670
-0.0307
551
0.103
8.850
0.1187
1878
0.003
Panel B: LARGE NONTAXABLE
FIRMS
LAG_PDNFC>0
Intercept
LAG_PDCNF
PUBLIC
PUBLIC*LAG_PDCNF
FOREIGN
FOREIGN*PUBLIC
FOREIGN*LAG_PDCNF
FOREIGN*PUBLIC*LAG_PDCNF
Coefficient
0.025
-1.200
-0.034
1.276
-0.025
0.036
1.276
-1.545
p-value
0.547
0.000
0.014
0.000
0.147
0.109
0.006
0.008
Coefficient
-0.026
-0.028
0.017
0.228
0.012
-0.017
-0.233
0.686
p-value
0.197
0.457
0.039
0.496
0.244
0.236
0.146
0.076
0.280
0.69
530
0.595
22.300
0.08
457
0.000
F statistic: a3 + a7 = 0
Adj R-squared
N
27
LAG_PDCNF<=0
TABLE 7
Summary Statistics - 2006
('000,000)
Sample for H3: N = 9,103
Mean
625.058
11.841
13.159
0.646
0.609
-2.736
0.144
-0.203
-0.096
0.410
1.022
0.010
0.060
0.132
0.194
ASSETS
TNI
TI
TAXABLE
ΔRESERVE
PDCNF
PUBLIC
2006ΔRESERVE%
2005ΔRESERVE%
HIGH
2005ΔRESERVE%*HIGH
PUBLIC*2005ΔRESERVE%
PUBLIC*HIGH
PUBLIC*HIGH*2005ΔRESERVE%
AUDIT2004
28
Std. Err.
100.869
1.189
1.026
0.005
0.438
0.961
0.004
0.085
0.092
0.005
0.061
0.031
0.002
0.021
0.001
TABLE 8
Results from Regressions: 2006CHRESERVE% = LAG_ΔRESERVE%
Domestic Firms
2006CHRESERVE%i = β0 + β12005ΔRESERVE%i + β2HIGHi + β32005ΔRESERVE%i*HIGHi + β4PUBLICi
+ β5PUBLICi*2005ΔRESERVEI+ β6HIGHi*PUBLICi + β72005RESERVE%i*HIGHi*PUBLICi + ui
All Domestic Firms
Intercept
2005ΔRESERVE%
HIGH
2005Δ RESERVE%*HIGH
PUBLIC
PUBLIC*2005ΔRESERVE%
HIGH*PUBLIC
PUBLIC*HIGH*2005ΔRESERVE%
AUDIT2004
Adj R-squared
N
Coefficient
1.172
0.179
-5.096
-0.078
-0.554
0.032
1.462
0.027
0.870
0.092
9103
29
p-value
0.061
0.000
0.000
0.000
-0.087
0.441
-0.003
0.656
0.261
Domestic Large Firms
Coefficient
3.512
0.307
-5.124
-0.017
-1.143
-0.287
2.404
0.332
0.000
0.123
2266
p-value
0.012
0.000
0.000
0.746
0.007
0.000
0.000
0.000