Do Managers Use the Valuation Allowance Account to Manage Earnings Around Certain Earnings Targets?

41 Pages Posted: 7 Aug 2003

See all articles by Mary Margaret Frank

Mary Margaret Frank

University of Virginia - Darden School of Business

Sonja O. Rego

Indiana University - Kelley School of Business - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: January 2006

Abstract

This paper provides additional evidence on earnings management via the deferred tax asset valuation allowance account (VAA). Earlier publications that do not find evidence of earnings management via the VAA examine contractual incentives using broad samples. A more recent publication finds evidence consistent with earnings management via the VAA but examines capital market-based incentives using a homogeneous sample. To bridge the gap between these studies, we exploit a heterogeneous sample over an extended time period but examine capital market-based incentives to manage earnings. The results provide substantial evidence that firms use the VAA to smooth earnings toward the mean analyst forecast. However, the results do not provide evidence that firms use the VAA to smooth earnings toward positive or prior year's reported earnings targets or engage in "big bath" behavior for any of the earnings targets.

Keywords: Valuation Allowance Account, Earnings Management, Deferred Taxes

JEL Classification: M41, M49, H25

Suggested Citation

Frank, Mary Margaret and Rego, Sonja O., Do Managers Use the Valuation Allowance Account to Manage Earnings Around Certain Earnings Targets? (January 2006). Darden Business School Working Paper No. 03-09, Available at SSRN: https://ssrn.com/abstract=427300 or http://dx.doi.org/10.2139/ssrn.427300

Mary Margaret Frank

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4432 (Phone)
434-243-5021 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/frank.htm

Sonja O. Rego (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812 855-6356 (Phone)

HOME PAGE: http://kelley.iu.edu/Accounting/faculty/page12887.cfm?ID=33017

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,034
Abstract Views
6,643
rank
25,270
PlumX Metrics