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The Information Content of Tax Expense for Firms Reporting Losses
Author(s) -
DHALIWAL DAN S.,
KAPLAN STEVEN E.,
LAUX RICK C.,
WEISBROD ERIC
Publication year - 2013
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/j.1475-679x.2012.00466.x
Subject(s) - taxable income , allowance (engineering) , business , private information retrieval , deferred tax , valuation (finance) , persistence (discontinuity) , accounting , actuarial science , economics , public economics , state income tax , gross income , operations management , tax reform , computer science , computer security , geotechnical engineering , engineering
We investigate whether management's decision regarding the recognition of the valuation allowance (VA) for deferred tax assets 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 or not the firm has positive taxable income (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.