Does Disclosure Prominence Affect Firm Activities? Tax Planning Responses to Tax-Related Disclosure Deregulation

This study investigates whether changes in disclosure prominence affect the activities of firms. We exploit a plausibly exogenous shock that reduces the prominence of a tax-related disclosure made by certain Korean firms. Using a difference-in-differences framework, we test whether this disclosure deregulation shock affects firms’ tax planning activities. We find that, consistent with managers responding to heightened information costs imposed on financial statement users by a reduction in disclosure prominence, affected firms exhibit more tax planning relative to unaffected firms after the deregulation event. The tax planning effects of disclosure prominence vary predictably with the extent of shareholder information processing costs. Taken together, our findings offer new evidence that disclosure prominence affects firms’ activities.