Changes in Tax Footnote Disclosure Quality

We examine trends in the disclosure quality of the income tax footnote in annual 10-K filings over the period 1996–2020. In contrast to claims by some practitioners and academics that the income tax footnote has become too complex, we document a marked increase in readability. Specifically, our results suggest that, while the quantity of textual disclosure in the income tax footnote has increased over time, the tax footnote has become more readable across several measures of readability. Changes in firm characteristics do not explain the improved trends in readability. We find some evidence suggesting that higher probabilities of regulatory scrutiny and shareholder litigation attenuate, but do not reverse, the trends in readability. We also find that the language used in the income tax footnote has become more similar among industry peers over time. Finally, we show that improved tax footnote readability is associated with reduced dispersion in analyst tax forecasts and stock price crash risk, consistent with improvements in tax disclosure reaping capital market benefits.