Tax-related mandatory risk factor disclosures, future profitability, and stock returns

John L. Campbell (), Mark Cecchini (), Anna M. Cianci (), Anne C. Ehinger () and Edward M. Werner ()
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John L. Campbell: University of Georgia
Mark Cecchini: University of South Carolina
Anna M. Cianci: Wake Forest University
Anne C. Ehinger: Florida State University
Edward M. Werner: Rutgers, The State University of New Jersey

Review of Accounting Studies, 2019, vol. 24, issue 1, No 8, 264-308

Abstract: Abstract Prior research finds that mandatory risk factor disclosures are informative in that they increase investors’ assessments of the volatility of a firm’s cash flows. However, the literature is silent as to whether these disclosures provide information about the level of future cash flows and, ultimately, their implications for firm value. We address this question by examining the association between Form 10-K risk factor disclosures and future cash flows levels and stock returns. We use the setting of taxes because it is relatively easier to identify the specific income and cash flow statement line items to which these risks relate, and offer two main results. First, we find that tax risk factor disclosures are positively associated with future cash flows. This suggests that, on average, tax risk factor disclosures relate to tax positions that are rewarded with future tax savings. Second, we find that investors incorporate this relation into stock prices. In additional analysis, we find no evidence of a drift in stock prices, suggesting that investors incorporate the implications of tax risk factor disclosures in a timely manner. Overall, our results suggest that risk factor disclosures provide information about the level of a firm’s future cash flows, that the risks discussed in these disclosures are – on average – value-increasing, and that investors incorporate this information into current stock prices.

Keywords: Textual analysis; Risk factor disclosures; Regulation; Future cash flows; Firm valuation (search for similar items in EconPapers)
JEL-codes: D8 M41 M48 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s11142-018-9474-y

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