The Information Content of Tax Expense for Firms Reporting Losses

42 Pages Posted: 28 Jun 2010 Last revised: 19 Apr 2012

See all articles by Dan S. Dhaliwal

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Steven E. Kaplan

Arizona State University

Rick Laux

Purdue University

Eric H. Weisbrod

University of Kansas - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: April 17, 2012

Abstract

We investigate whether management’s decision regarding the recognition of the valuation allowance for deferred tax assets (VA) under ASC 740 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 the firm has positive taxable income or not (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

Dhaliwal, Dan S. and Kaplan, Steven E. and Laux, Rick C. and Weisbrod, Eric H., The Information Content of Tax Expense for Firms Reporting Losses (April 17, 2012). Available at SSRN: https://ssrn.com/abstract=1631948 or http://dx.doi.org/10.2139/ssrn.1631948

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Steven E. Kaplan

Arizona State University ( email )

Tempe, AZ 85287
United States
602-965-6498 (Phone)
602-965-8392 (Fax)

Rick C. Laux (Contact Author)

Purdue University ( email )

Rawls Hall 4036
100 S. Grant Street
West Lafayette, IN 47906
United States

Eric H. Weisbrod

University of Kansas - School of Business ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

HOME PAGE: http://https://business.ku.edu/eric-weisbrod

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