Abstract

http://ssrn.com/abstract=2643
 


 



Earnings Management and Deferred Taxes: The Valuation Allowance for Deferred Tax Assets


Gregory S. Miller


University of Michigan, Stephen M. Ross School of Business

Douglas J. Skinner


The University of Chicago - Booth School of Business

May 1996


Abstract:     
A long-standing issue in the accounting literature is whether corporate managers exercise their accounting discretion to influence reported earnings. This paper extends this research by investigating whether managers manipulate the 'valuation allowance' for deferred tax assets. This account has several features that recommend it as a good place to look for earnings management. First, since this account is fairly 'new' (1992), there are no well-established formulae, or even any clear guidelines, for deciding on the appropriate level for this allowance. Second, the appropriate level of the allowance depends on managers' expectations about future earnings. For both of these reasons managers must exercise an unusual amount of discretion in choosing the appropriate level for this account. Finally, for many firms this provision is large enough to effect material adjustments to accounting earnings. We find that there is a good deal of variation across firms in the level of the valuation allowance. Part of this variation is explained by factors that appropriately reflect managers' expectations about whether their firms' deferred tax assets will be realized. In addition, after controlling for these factors, we find support for two earnings-management hypotheses: both the debt/equity hypothesis and income-smoothing have empirical support.

JEL Classification: M41, M43

working papers series





Not Available For Download

Date posted: June 16, 1998  

Suggested Citation

Miller, Gregory S. and Skinner, Douglas J., Earnings Management and Deferred Taxes: The Valuation Allowance for Deferred Tax Assets (May 1996). Available at SSRN: http://ssrn.com/abstract=2643

Contact Information

Gregory S. Miller
University of Michigan, Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States
Douglas J. Skinner (Contact Author)
The University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7137 (Phone)

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