The Information Content of the Deferred Tax Valuation Allowance

Posted: 26 Feb 2003

See all articles by Krishna R. Kumar

Krishna R. Kumar

George Washington University

Gnanakumar Visvanathan

George Mason University - Department of Accounting

Abstract

An event study demonstrates that disclosures of changes in deferred tax valuation allowances (VA) provide information beyond contemporaneous earnings reports. Prior research shows that, in setting VA, managers consider the extent that taxable income is available from various sources for the realization of deferred tax assets (DTA). Our evidence supports a characterization where investors use VA disclosures to infer management's expectations about DTA, its realizability and future taxable income available for realization. These findings are more generally relevant for assessing the consequences of reporting standards that require or permit management judgment, especially about future outcomes. In particular, they support the view that discretion can be a vehicle for management to communicate expectations to the benefit of investors.

Keywords: deferred taxes, valuation allowance, information content, event study, future profits

JEL Classification: M41, M43, G14, D82

Suggested Citation

Kumar, Krishna R. and Visvanathan, Gnanakumar, The Information Content of the Deferred Tax Valuation Allowance. Available at SSRN: https://ssrn.com/abstract=359780

Krishna R. Kumar (Contact Author)

George Washington University ( email )

710 21st Street NW
Washington, DC 20052
United States
202-994-5976 (Phone)
202-994-5164 (Fax)

Gnanakumar Visvanathan

George Mason University - Department of Accounting ( email )

Fairfax, VA
United States
703-993-4236 (Phone)

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