Skip to main content
eScholarship
Open Access Publications from the University of California

The information content of the deferred tax valuation allowance for venture capital backed IPO firms.

  • Author(s): Allen, Eric James
  • Advisor(s): Dechow, Patricia
  • Sloan, RIchard G.
  • et al.
Abstract

In this dissertation I examine the deferred tax disclosures of a unique sample of venture capital backed firms that conducted their initial public offering (IPO) between 1996 and 2008, and generated a net operating loss (NOL) carry-forward. I find that 83% of the sample firms record an allowance fully valuing-out the carry-forward's associated deferred tax asset. This full allowance is, on average, 72% of total assets - a fact which provides strong evidence (at least in terms of this accrual) that these firms are not upwardly managing their earnings prior to IPO. I show that the size of a firm's NOL, and proxies for its expectation of future taxable income have significant predictive power for the magnitude of the valuation allowance. I also show that the allowance sends a strong negative signal about a firm's future book income. Both of these results support the contention that, though conservative, the valuation allowance does provide information about an IPO firm's economic fundamentals. Finally, I introduce a new explanation for the presence of the allowance: the ownership change limitation. This limitation can cause a firm to record an allowance independent of its expectations about future earnings. I provide evidence that firms take this limitation into account when recording the valuation allowance, and that controlling for it can enhance the allowance's signal regarding future income.

Main Content
Current View