Trouble in Paradise? Disclosure After Tax Haven Leaks

Tax haven leaks have attracted negative public attention in recent years, prompting scrutiny of corporate behavior in leaked jurisdictions. We investigate whether U.S. companies with subsidiaries in implicated tax havens change their disclosure behavior after a leak. The Offshore Leaks, Panama Papers, Bahamas Leaks, and Paradise Papers are included in this study. We analyze the leaks as separate exogenous shocks to the affected firms' behavior using a difference-in-differences approach. First, we focus on the readability of tax footnotes in annual reports. Our results suggest that tax footnotes are less readable after a firm's tax haven is implicated in a leak. This finding suggests that implicated firms try to obfuscate information and hide unethical conduct. Second, we investigate firms' disclosures of tax expenses using GAAP effective tax rates and find that companies report higher tax expenses after a leak. These changes in behavior could indicate that firms are concerned about the increasingly critical public attitude toward doing business in leaked low-tax jurisdictions and that they are taking measures to counteract possible negative reputational consequences.