A Comparison of Investors’ and Analysts’ Biases in Interpreting Book-Tax Difference: Evidence from Korean Stock Market

This study examines and compares investors’ and analysts’ biases in interpreting book-tax difference (hereafter BTD). The empirical results of using 1,544 Korean firm-year observations from 2001 to 2008 are as follows. First, we find that BTD is negatively associated with the value-price (V/P) ratio. This result implies that investors have more optimistic biases than analysts do in interpreting BTD. Second, for high institutional ownership sample, the negative association between BTD and V/P ratio would disappear. This empirical result suggests that sophisticated institutional investors understand the meaning of BTD better than general investors. Third, for lower analyst following sample, there was no significant association between BTD and V/P ratios. This implies that higher analyst following reduces biases in analysts’ earnings forecasts. This study adds to the growing body of evidence that is related to the efficiency of analysts’ earnings forecasts. It is the first empirical study to show that investors do not fully incorporate the meaning of BTD into their stock pricing compared with analysts’ earnings forecasts.