Public Tax Disclosures and Investor Perceptions

ABSTRACT Regulators are increasingly considering and mandating additional public tax disclosures to enhance transparency and promote scrutiny of corporate tax avoidance. We conducted three experiments to examine how such disclosures influence retail investors' perceptions of firms with identical effective tax rates but different tax avoidance methods. In the first experiment, participants evaluated whether firms were paying their fair share of taxes. We find that additional public tax disclosures reduce retail investors' tendency to differentiate between tax avoidance methods, subsequently affecting their willingness to invest. Specifically, participants use easy‐to‐process summary tax information in the additional public tax disclosure as a heuristic shortcut. The second and third experiments demonstrate that modifying the disclosure format and prompting participants to assess tax aggressiveness rather than fairness can mitigate these adverse effects. However, none of the cases significantly alters participants' perceptions compared to the baseline condition of no public tax disclosure. Overall, our findings provide insights into the design of, and the debate surrounding, additional public tax disclosures.