Investors’ Information Risk Perception of Book-Tax Differences

We examine whether and how book-tax differences (BTDs) may affect investors’ perception of information risk. Using bid-ask spreads as a proxy for information risk, we document a positive association between bid-ask spreads around 10-K filing dates and positive temporary BTDs for firms with low analyst following or institutional ownership, consistent with larger positive temporary BTDs exacerbating information asymmetry for firms with poor information environments. Furthermore, this positive association is less pronounced for firms with higher analyst following or institutional ownership, suggesting that financial analysts and institutional investors mitigate information risk from positive temporary BTDs through their monitoring and information intermediary roles. We find similar results using positive permanent BTDs. Overall, our findings suggest that investors factor BTDs into their assessments of information risk, highlighting the importance of considering information risk in the valuation of BTDs.

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Publication Details

Journal
Journal of risk and financial management
Published
2025-12-20
DOI
https://doi.org/10.3390/jrfm19010006
Primary Topic
Auditing, Earnings Management, Governance
Type
article
Field-Weighted Citation Impact
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article

Investors’ Information Risk Perception of Book-Tax Differences

Moshe Hagigi, Kun Yu
Journal of risk and financial management
Auditing, Earnings Management, Governance
article

Investors’ Information Risk Perception of Book-Tax Differences

Moshe Hagigi, Kun Yu
article en

Abstract

We examine whether and how book-tax differences (BTDs) may affect investors’ perception of information risk. Using bid-ask spreads as a proxy for information risk, we document a positive association between bid-ask spreads around 10-K filing dates and positive temporary BTDs for firms with low analyst following or institutional ownership, consistent with larger positive temporary BTDs exacerbating information asymmetry for firms with poor information environments. Furthermore, this positive association is less pronounced for firms with higher analyst following or institutional ownership, suggesting that financial analysts and institutional investors mitigate information risk from positive temporary BTDs through their monitoring and information intermediary roles. We find similar results using positive permanent BTDs. Overall, our findings suggest that investors factor BTDs into their assessments of information risk, highlighting the importance of considering information risk in the valuation of BTDs.

Journal of risk and financial managementVol. 19(1)
Boston University (US), University of Massachusetts Boston (US)
No poverty
Openalex Percentile: Top 25%
Auditing, Earnings Management, Governance
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