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The Information Content of the Deferred Tax Valuation Allowance: Evidence from Venture-Capital-Backed IPO Firms

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  • Eric Allen

    (School of Business, University of California, Riverside, CA 92521, USA)

Abstract

This study examines the deferred tax valuation allowance disclosures of a sample of venture-capital-backed IPO firms that incurred a net operating loss (NOL) in the period prior to their public offering (IPO). I find that 82 percent of these firms record an allowance that reduces the associated deferred tax asset to zero, that the choice to record the allowance is largely driven by a firm’s history of losses, and that the allowance is associated with lower future book income. I further propose a new explanation for the presence of the allowance: the Section 382 ownership change limitation, which can cause firms to record an allowance independent of their past profitability or expectations about future earnings. I find that firms consider this limitation when recording the allowance, and that controlling for it can enhance the signal regarding future income.

Suggested Citation

  • Eric Allen, 2025. "The Information Content of the Deferred Tax Valuation Allowance: Evidence from Venture-Capital-Backed IPO Firms," JRFM, MDPI, vol. 18(7), pages 1-25, July.
    • Handle: RePEc:gam:jjrfmx:v:18:y:2025:i:7:p:384-:d:1699362
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    References listed on IDEAS

    as
    1. Eric J. Allen & Jeffrey C. Allen & Sharat Raghavan & David H. Solomon, 2023. "On the tax efficiency of startup firms," Review of Accounting Studies, Springer, vol. 28(4), pages 1887-1928, December.
    2. Daniel J. Bradley & Bradford D. Jordan & Ha-Chin Yi & Ivan C. Roten, 2001. "Venture Capital And Ipo Lockup Expiration: An Empirical Analysis," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 24(4), pages 465-493, December.
    3. Bradley, Daniel J & et al, 2001. "Venture Capital and IPO Lockup Expiration: An Empirical Analysis," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 24(4), pages 465-493, Winter.
    4. Ball, Ray & Shivakumar, Lakshmanan, 2008. "Earnings quality at initial public offerings," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 324-349, August.
    5. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
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