Investors’ ability to interpret and assess tax legislation

Accounting

Speaker:Prof Kevin Holland, Southampton Management School
Date: Wednesday 9 January 2013
Time: 14:00 - 15:30
Location: Building One: Bateman Lecture Theatre

Further details

With corporate income tax legislation characterised as complex (Plumlee 2003) and the reporting of companies’ tax avoidance activities described as being obfuscatory (Desai and Dharmapala 2009) it is pertinent to examine the ability of investors to process tax information. Using the introduction of legislation in the United Kingdom for the establishment of Real Estate Investment Trusts (REITS), the paper uses hindsight to compare abnormal returns of companies converting to REIT status with a sample that chose not to convert. The analysis suggests that while investors are able to identify the beneficial effects of the conversion option, they have limited ability in discriminating between those companies subsequently converting and those that did not. Investor limitations appear to be driven by a weakness in understanding of companies’ tax strategies and not the complexity of the legislation per se.