How Do Hedge Fund Activists Use and Affect Tax Reporting? Evidence from the Valuation Allowance for Deferred Tax Assets

62 Pages Posted: 6 Jun 2024

See all articles by Mary Cowx

Mary Cowx

Arizona State University (ASU) - W.P. Carey School of Business

Jennifer L. Glenn

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Patrick Kielty

Ohio State University (OSU) - Fisher College of Business

Sean T. McGuire

Texas A&M University - Department of Accounting

Date Written: June 04, 2024

Abstract

This study uses the valuation allowance (VA) for deferred tax assets (DTAs) to examine whether hedge fund activists (HFAs) use and affect tax reporting. Specifically, we investigate whether HFAs target firms with VAs and whether target firms are more likely to release VAs postintervention. We find that the existence, magnitude, and increases in the VA are positively associated with interventions. We also find that interventions are positively associated with releases of VAs in the intervention year and for the subsequent two years. VA releases appear to stem from implemented tax avoidance strategies and changes in tax reporting rather than real changes in operating performance or earnings management. Overall, HFAs appear to understand the interplay between tax planning and tax reporting and use both to unlock value in target firms.

Keywords: Accounting for Income Taxes, ASC 740, Deferred Tax Assets, Hedge Fund Activists, Valuation Allowance JEL Codes: G23, G32, H26, M41

Suggested Citation

Cowx, Mary and Glenn, Jennifer L. and Kielty, Patrick and McGuire, Sean T., How Do Hedge Fund Activists Use and Affect Tax Reporting? Evidence from the Valuation Allowance for Deferred Tax Assets (June 04, 2024). Available at SSRN: https://ssrn.com/abstract=4853883 or http://dx.doi.org/10.2139/ssrn.4853883

Mary Cowx

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

Jennifer L. Glenn (Contact Author)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Patrick Kielty

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Sean T. McGuire

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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

Paper statistics

Downloads
31
Abstract Views
143
PlumX Metrics