Book-tax differences and risk: does shareholder activism matter?

Abstract

We investigate the relationship between book-tax differences (BTD) and three specific types of risk, firm total risks, systematic risks, and idiosyncratic risks. In addition, we examine the moderating role of shareholder activism via institutional shareholders on these relationships and determine whether the identified relationships differ between the investigated specific types of risk. Using a large sample of Malaysian non-financial listed firms from 2013 to 2017, our findings are two-fold. First, we find a positive relationship between BTD and firm total risk, and between BTD and idiosyncratic risk. We also find that the weight of the BTD's impact on risk is significantly different between systematic and idiosyncratic risks. Second, we also find a significant moderating role of shareholder activism via institutional shareholders on the BTD's relationships with firm total risk and idiosyncratic risk. Our study contributes to the governance, risk, and tax literature by providing evidence showing that BTD can increase firm total and idiosyncratic risks. The impact of BTD on idiosyncratic risk is more pronounced than systematic risk where shareholder activism is steadily increasing. Our findings have important implications for tax authorities, fund managers, investors, and practitioners.

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