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Investors’ Information Risk Perception of Book-Tax Differences

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  • Moshe Hagigi

    (Questrom School of Business, Boston University, 595 Commonwealth Ave., Boston, MA 02215, USA)

  • Kun Yu

    (College of Management, University of Massachusetts Boston, 100 Morrissey Blvd., Boston, MA 02125, USA)

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.

Suggested Citation

  • Moshe Hagigi & Kun Yu, 2025. "Investors’ Information Risk Perception of Book-Tax Differences," JRFM, MDPI, vol. 19(1), pages 1-26, December.
    • Handle: RePEc:gam:jjrfmx:v:19:y:2025:i:1:p:6-:d:1822932
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