Public country-by-country reporting, tax avoidance and the cost of equity capital: pan-European evidence

Purpose – The purpose of this paper is to investigate the role of tax avoidance in multinational corporations’ management decisions to voluntarily disclose country-by-country (CbC) information in annual reports and examine investors’ perceptions of these disclosures. 

Design/methodology/approach – The authors use robust cluster standard errors pooled regression and a sample of 3,243 firm-year observations of European multinational corporations (MNCs) between 2007 and 2018. CbC reporting data are hand-collected from MNCs’ annual reports, whereas the firm-level financial variables are obtained from the Thomson Reuters DataStream and IBES databases. Data for the Financial Secrecy Index are obtained from the Tax Justice Network website. 

Findings – This study demonstrates that firms engaging in higher levels of tax avoidance tend to disclose less CbC information. Furthermore, the authors find that investors reward increased transparency and tax-responsible behavior by lowering the cost of equity capital. The analysis also shows that the impact of CbC reporting on the cost of equity is more pronounced for firms with lower tax avoidance. Additionally, the authors find that multinational corporations with high tax avoidance operating in countries with high financial secrecy are less likely to disclose CbC information. 

Originality/value – This study contributes to the growing discourse on corporate tax behavior by offering policy-relevant insights for regulators, policymakers and accounting standard-setters in support of mandatory public CbC reporting for non-financial multinational corporations.