The Information Content of Tax Expense for Firms Reporting Losses
Journal of Accounting Research, Forthcoming
42 Pages Posted: 2 Jul 2012 Last revised: 21 Apr 2013
Date Written: June 28, 2012
We investigate whether management’s decision regarding the recognition of the valuation allowance (VA) for deferred tax assets provides incremental information about the persistence of accounting losses. We introduce a classification scheme that assigns loss firm-years into three categories based on whether management appears to have recognized a material change in the VA, and whether or not the firm has positive taxable income (e.g., a net operating loss). The results of our study show that our tax categories contain information about the persistence of accounting losses over the following three years beyond variables previously identified to predict loss persistence. This incremental information is consistent with management using private information about the firm’s future prospects in setting the VA. Finally, we find that investors’ pricing of the VA varies with the saliency of the tax signal and the information environment of the firm.
Keywords: Tax Expense, Deferred Taxes, Valuation Allowance, Loss Firms, Accounting Losses
JEL Classification: G12, G14, H25, M41
Suggested Citation: Suggested Citation