Economic consequences of increasing the conformity in accounting for uncertain tax benefits

Commentary during the development of FASB Interpretation no. 48 suggests the interpretation could be costly for firms because new disclosure requirements could be used by the IRS to more effectively challenge uncertain tax positions. Stock returns around FIN 48 pronouncements suggest investors were not concerned about an increase in tax costs, and investors responded favorably to initial disclosures required under FIN 48. However, we document a significant negative market reaction to subsequent news of a Senate inquiry into these disclosures consistent with investors revising their beliefs over the potential for additional tax costs.