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Does IFRS information on tax loss carryforwards and negative performance improve predictions of earnings and cash flows?

Author

Listed:
  • Sandra Dreher

    (Otto-von-Guericke-Universität Magdeburg)

  • Sebastian Eichfelder

    (Otto-von-Guericke-Universität Magdeburg)

  • Felix Noth

    (Otto-von-Guericke-Universität Magdeburg
    Halle Institute for Economic Research)

Abstract

We analyze the usefulness of accounting information on tax loss carryforwards and negative performance to predict earnings and cash flows. We use hand-collected information on tax loss carryforwards and corresponding deferred taxes from the International Financial Reporting Standards tax footnotes for listed firms from Germany. Our out-of-sample tests show that considering accounting information on tax loss carryforwards does not enhance performance forecasts and typically even worsens predictions. The most likely explanation is model overfitting. Besides, common forecasting approaches that deal with negative performance are prone to prediction errors. We provide a simple empirical specification to account for that problem.

Suggested Citation

  • Sandra Dreher & Sebastian Eichfelder & Felix Noth, 2024. "Does IFRS information on tax loss carryforwards and negative performance improve predictions of earnings and cash flows?," Journal of Business Economics, Springer, vol. 94(1), pages 1-39, January.
    • Handle: RePEc:spr:jbecon:v:94:y:2024:i:1:d:10.1007_s11573-023-01147-7
    DOI: 10.1007/s11573-023-01147-7
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    More about this item

    Keywords

    Performance forecast; Out-of-sample tests; Deferred tax assets; Tax loss carryforwards;
    All these keywords.

    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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