@article{9c1642e0763e439f85177786fa9aac5d,
title = "Tax-related mandatory risk factor disclosures, future profitability, and stock returns",
abstract = "Prior research finds that mandatory risk factor disclosures are informative in that they increase investors{\textquoteright} assessments of the volatility of a firm{\textquoteright}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{\textquoteright}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 = "Firm valuation, Future cash flows, Regulation, Risk factor disclosures, Textual analysis",
author = "Campbell, {John L.} and Mark Cecchini and Cianci, {Anna M.} and Ehinger, {Anne C.} and Werner, {Edward M.}",
note = "Funding Information: We are thankful for helpful comments and suggestions from an anonymous reviewer, Ted Christensen, James Chyz, Dan Dhaliwal, Jenna D{\textquoteright}Adduzio, Josh Filzen, Xinjiao “Jenny” Guan, Lisa Hinson, Jeff Hoopes (discussant), Jing Huang (discussant), Todd Kravet, Hai Lu, Russ Lundholm, Volkan Muslu, Santhosh Ramalingegowda, Bob Resutek, Bridget Stomberg, Jake Thornock, Karen Ton (discussant), Erin Towery, Ben Whipple, the University of Georgia tax readings group, and workshop participants at the American Accounting Association (AAA) Southeast Regional Meeting, the American Accounting Association (AAA) Annual Meeting, and the Financial Accounting and Reporting Section (FARS) Midyear Meeting. John Campbell gratefully acknowledges the financial support of a Terry Sanford Research Grant from the Terry College of Business at the University of Georgia. Funding Information: Acknowledgements We are thankful for helpful comments and suggestions from an anonymous reviewer, Ted Christensen, James Chyz, Dan Dhaliwal, Jenna D{\textquoteright}Adduzio, Josh Filzen, Xinjiao “Jenny” Guan, Lisa Hinson, Jeff Hoopes (discussant), Jing Huang (discussant), Todd Kravet, Hai Lu, Russ Lundholm, Volkan Muslu, Santhosh Ramalingegowda, Bob Resutek, Bridget Stomberg, Jake Thornock, Karen Ton (discussant), Erin Towery, Ben Whipple, the University of Georgia tax readings group, and workshop participants at the American Accounting Association (AAA) Southeast Regional Meeting, the American Accounting Association (AAA) Annual Meeting, and the Financial Accounting and Reporting Section (FARS) Midyear Meeting. John Campbell gratefully acknowledges the financial support of a Terry Sanford Research Grant from the Terry College of Business at the University of Georgia. Publisher Copyright: {\textcopyright} 2018, Springer Science+Business Media, LLC, part of Springer Nature.",
year = "2019",
month = mar,
day = "15",
doi = "https://doi.org/10.1007/s11142-018-9474-y",
language = "American English",
volume = "24",
pages = "264--308",
journal = "Review of Accounting Studies",
issn = "1380-6653",
publisher = "Springer New York",
number = "1",
}