TY - JOUR
T1 - ANNUAL REPORT READABILITY AND SHARE REPURCHASES UNDER A TEMPORARY TAX HOLIDAY
AU - Zhao, Xin
AU - Filbeck, Greg
AU - Deshmukh, Ashutosh V.
N1 - Publisher Copyright:
© 2020 Emerald Publishing Limited.
PY - 2020
Y1 - 2020
N2 - Prior studies document increased share repurchase activity after the temporary tax holiday under the American Jobs Creation Act (AJCA) of 2004. Our study examines the moderating effect of financial statement readability on share repurchases in response to a temporary reduction in repatriation tax. Building on prior literature, we argue that firms with excess cash overseas, despite the lack of investment opportunities, produce less readable financial statements to hide bad news. We find that firms with less readable financial statements initiated higher levels of share repurchases after the AJCA. Our results contribute to the existing literature showing (1) firms hold excess cash overseas mainly for tax reasons rather than for nontax reasons such as precautionary motives or empire-building concerns and (2) firms return excess funds to investors rather than squander the funds once the tax cost of repatriation is reduced. Firms that suffer from the overinvestment problem using hard-to-read financial statements to hide the bad news of a lack of investment opportunities are more likely to benefit from the tax cut. Our study provides timely evidence of potential firm response to the 2017 Tax Cut and Jobs Act, which permanently removes the repatriation tax.
AB - Prior studies document increased share repurchase activity after the temporary tax holiday under the American Jobs Creation Act (AJCA) of 2004. Our study examines the moderating effect of financial statement readability on share repurchases in response to a temporary reduction in repatriation tax. Building on prior literature, we argue that firms with excess cash overseas, despite the lack of investment opportunities, produce less readable financial statements to hide bad news. We find that firms with less readable financial statements initiated higher levels of share repurchases after the AJCA. Our results contribute to the existing literature showing (1) firms hold excess cash overseas mainly for tax reasons rather than for nontax reasons such as precautionary motives or empire-building concerns and (2) firms return excess funds to investors rather than squander the funds once the tax cost of repatriation is reduced. Firms that suffer from the overinvestment problem using hard-to-read financial statements to hide the bad news of a lack of investment opportunities are more likely to benefit from the tax cut. Our study provides timely evidence of potential firm response to the 2017 Tax Cut and Jobs Act, which permanently removes the repatriation tax.
UR - http://www.scopus.com/inward/record.url?scp=85115093911&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85115093911&partnerID=8YFLogxK
U2 - 10.1108/S1058-749720200000027003
DO - 10.1108/S1058-749720200000027003
M3 - Article
AN - SCOPUS:85115093911
SN - 1058-7497
VL - 27
SP - 73
EP - 102
JO - Advances in Taxation
JF - Advances in Taxation
ER -