No. 62: Does tax return disclosure affect information asymmetry among investors?

Abstract

Tax return information is often complex and difficult to interpret. Whether its public availability benefits unsophisticated users remains an empirical question. This study examines whether public disclosure of tax return information affects information asymmetry among more- and less- sophisticated investors. I investigate the unique setting of mandatory disclosure of three bottom-line income tax items in Australia. Using a difference-in-difference design with an entropy-balanced control group, I find evidence that information asymmetry decreased after the mandatory disclosure. The effect is more pronounced for firms with a poorer information environment, with higher individual ownership, and with lower media attention. The magnitude of the postdisclosure decline in the bid-ask spread correlates with the degree of the absolute book-tax gap of tax expense. This result is concentrated among firms with only mandatory disclosure—without any voluntary commitment or voluntary disclosure. Overall, the results suggest that public disclosure of tax return information does have the potential to reduce information asymmetry among investors.

Participating Institutions

TRR 266‘s main locations are Paderborn University (Coordinating University), HU Berlin, and University of Mannheim. All three locations have been centers for accounting and tax research for many years. They are joined by researchers from LMU Munich, Frankfurt School of Finance and Management, WHU – Otto Beisheim School of Management, ESMT Berlin and Goethe University Frankfurt who share the same research agenda.