Incremental Value Relevance of Unrecognized Deferred Taxes: Evidence from the United Kingdom

29 Pages Posted: 16 May 2006

See all articles by Stephen Gregory Lynn

Stephen Gregory Lynn

City University of Hong Kong (CityUHK) - Department of Accountancy

Chandra Seethamraju

Franklin Templeton Investments

Ananth Seetharaman

Saint Louis University - Department of Accounting

Date Written: May 2006

Abstract

We examine empirically whether the use of the partial method for deferred taxes provides incremental information of use to investors. Specifically, we test whether U.K. capital markets valued unrecognized deferred tax amounts reported in the footnotes to U.K. annual reports, pursuant to U.K. Statement of Standard Accounting Practice (SSAP) 15. Our empirical model is based on Feltham and Ohlson (1995). We run iterative weighted least squares (IWLS) regression of year-end share prices on a decomposition of book value per share for a pooled sample of U.K. firm-years drawn from the years 1993 through 1998, and find positive associations with price for net deferred tax assets - both recognized and unrecognized. Moreover, we are unable to reject the null hypothesis that both parts of deferred taxes have similar multiples in our price regressions. These findings support some theoretical predictions in Sansing (1998), Guenther and Sansing (2000, 2004), and Amir et al. (2001).

Keywords: Deferred Income Tax, Valuation, Value Relevance

JEL Classification: G12, M41, M47, H25

Suggested Citation

Lynn, Stephen and Seethamraju, Chandrakanth and Seetharaman, Ananth, Incremental Value Relevance of Unrecognized Deferred Taxes: Evidence from the United Kingdom (May 2006). Available at SSRN: https://ssrn.com/abstract=902081 or http://dx.doi.org/10.2139/ssrn.902081

Stephen Lynn

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Chandrakanth Seethamraju

Franklin Templeton Investments ( email )

Multi Asset Strategies
P.O. Box 997152
San Mateo, CA 95899-7152
United States

Ananth Seetharaman (Contact Author)

Saint Louis University - Department of Accounting ( email )

3674 Lindell Blvd.
St. Louis, MO 63108
United States
314-977-2473 (Phone)
314-977-1473 (Fax)

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