An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Mark Bauman
University of Northern Iowa

Ken Shaw
University of Missouri - Columbia

Abstract: Under current accounting rules, U.S. multinationals are not required to record tax liabilities on earnings of foreign subsidiaries, if those earnings are considered indefinitely reinvested in those subsidiaries. While firms are required to disclose the cumulative amount of untaxed foreign earnings and the amount of related unrecognized deferred tax liability, considerable variation exists in these disclosures. Analyzing S&P 500 firms over 2000-2004, we find the positive impact of untaxed foreign earnings on share prices is decreasing in the unrecorded deferred tax liability on those earnings. Second, we show that the positive impact of untaxed foreign earnings on share prices is greater for firms which indicate an intention to repatriate foreign earnings under the one-time tax holiday provided under the American Jobs Creation Act of 2004. Finally, our results are more pronounced for firms that provide more transparent disclosure of their unrecorded tax liability.

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