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FASB Interpretation Number 48 (FIN 48) and Corporate Innovation

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Title:FASB Interpretation Number 48 (FIN 48) and Corporate Innovation
Authors:Nathan Goldman
Niklas Lampenius
Suresh Radhakrishnan
Arthur Stenzel
Jose Elias Feres de Almeida
Keywords:Uncertain Tax Positions
Fin 48
Radical Innovation
Incremental Innovation
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Date Issued:15 Aug 2020
Abstract:In this paper, we analyze the real effect of financial statement tax disclosures on corporate innovation activities. In 2007, the FASB issued FIN 48, which mandates the separate disclosure of reserves for unrecognized tax benefits (UTBs). Using patent applications as a measure of corporate innovation, we employ a difference-in-difference research design with publicly listed U.S. firms as the treatment group and privately held U.S. firms not subject to the disclosure requirements as the control group. We hypothesize and find robust evidence that following the onset of FIN 48, the number of patent applications by publicly listed firms decreased. We also provide evidence that the decrease is attributable to incremental innovation, which is more subject to the UTB disclosure requirements. Overall, our evidence provides support for the real effects of disclosures on innovation activities.
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