Does the mandatory disclosure of suppliers' tax uncertainties affect supply chain relations?

Xuedan Tao, Huabing Barbara Wang, Qian Xin and You Xu

Journal of Corporate Finance, 2024, vol. 89, issue C

Abstract: We investigate whether and how the public revelation of tax uncertainty affects supply chain relations by utilizing an exogenous shock to tax reporting under FIN 48, which mandates the disclosure of uncertain tax benefits (UTBs). Using a difference-in-differences research design, we find that firms disclosing UTBs experience a significant decrease in sales to major customers after FIN 48 relative to firms without tax uncertainty. Further mechanism analyses suggest a risk perception channel that the disclosure heightens customers' risk perception of the suppliers: the adverse effect is more pronounced for suppliers with higher tax uncertainty or ex ante corporate risk. However, we do not find evidence for a tax morale channel that customers are concerned about sourcing from a “bad corporate citizen.” In cross-sectional analyses, we find a stronger adverse effect when customers and suppliers are less likely to engage in private information sharing or tax coordination, when suppliers disclose higher-quality UTBs, or when customers have lower tax risk tolerance or switching costs. Overall, our findings document an externality of tax disclosure from the perspectives of supply chain partners, suggesting that the disclosure of tax uncertainty provides valuable information to corporate customers and affects a firm's trade relations.

Keywords: Supply chain relation; Tax uncertainty disclosure; Aggressive tax avoidance; FIN 48; Product markets (search for similar items in EconPapers)
JEL-codes: G39 H26 L14 M41 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0929119924001317
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:89:y:2024:i:c:s0929119924001317

DOI: 10.1016/j.jcorpfin.2024.102669

Access Statistics for this article

Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter

More articles in Journal of Corporate Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().