Tax Loss Carryforward Disclosure and Uncertainty

Abstract

This study examines firms’ voluntary disclosure of tax loss carryforward (TLCF) information. We identify a setting (conservative German accounting environment) under which the demand for TLCF disclosure is particularly pronounced and analyze firms’ TLCF disclosure behavior while controlling for overall reporting quality. We argue and find that uncertainty about the usability of TLCF is the main driver of voluntary TLCF disclosure. Value relevance tests suggest that the incremental effect of disclosure under uncertainty is positive, indicating the usefulness of firms’ voluntary disclosure. We also find that the content and type of disclosure vary systematically with the signal of uncertainty. While firms provide different kinds of complex TLCF information, investors only value very basic and less complex information. Our study provides detailed and unique insights into TLCF disclosure, documenting that managers enrich the information environment with voluntary disclosure that caters to expected investors’ needs, but the perception of the content’s usefulness is limited to simple information.

Keywords: tax loss carryforwards, disclosure, uncertainty, tax footnote, deferred taxes

JEL Classification: M40, M41, M49