Does Tax Return Disclosure Affect Information Asymmetry among Investors?

51 Pages Posted: 13 Sep 2021 Last revised: 20 Mar 2023

See all articles by Yuchen Wu

Yuchen Wu

Ludwig Maximilian University of Munich (LMU); TRR 266 Accounting for Transparency

Date Written: September 1, 2021

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.

Keywords: Tax return; Disclosure; Information asymmetry; Transparency

JEL Classification: H20; M41; G14; G18

Suggested Citation

Wu, Yuchen, Does Tax Return Disclosure Affect Information Asymmetry among Investors? (September 1, 2021). WU International Taxation Research Paper Series No. 2021-08, TRR 266 Accounting for Transparency Working Paper Series No. 62, Available at SSRN: https://ssrn.com/abstract=3921331 or http://dx.doi.org/10.2139/ssrn.3921331

Yuchen Wu (Contact Author)

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

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