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

Posted: 2 Mar 2006 Last revised: 15 May 2014

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: 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: Earnings Management, Valuation Allowance Account, Deferred Taxes

JEL Classification: M41, M43, 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? (2006). Journal of the American Taxation Association, Vol. 28, Spring 2006, Available at SSRN: https://ssrn.com/abstract=886376

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

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