The Information Content of Tax Expense for Firms Reporting Losses

Dan S. Dhaliwal, Steven E. Kaplan, Rick C. Laux, Eric Weisbrod

Research output: Contribution to journalArticle

18 Citations (Scopus)

Abstract

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.

Original languageEnglish (US)
Pages (from-to)135-164
Number of pages30
JournalJournal of Accounting Research
Volume51
Issue number1
DOIs
StatePublished - Mar 1 2013

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Information content
Expenses
Tax
Persistence
Incremental
Information environment
Assets
Private information
Taxable income
Deferred taxes
Classification schemes
Pricing
Investors
Management decisions

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

The Information Content of Tax Expense for Firms Reporting Losses. / Dhaliwal, Dan S.; Kaplan, Steven E.; Laux, Rick C.; Weisbrod, Eric.

In: Journal of Accounting Research, Vol. 51, No. 1, 01.03.2013, p. 135-164.

Research output: Contribution to journalArticle

Dhaliwal, Dan S. ; Kaplan, Steven E. ; Laux, Rick C. ; Weisbrod, Eric. / The Information Content of Tax Expense for Firms Reporting Losses. In: Journal of Accounting Research. 2013 ; Vol. 51, No. 1. pp. 135-164.
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