Analysts' Interpretation and Investors' Valuation of Tax Carryforwards
We examine how financial analysts and equity investors incorporate information on deferred taxes from carryforwards into earnings forecasts and share prices, respectively. We focus on carryforwards because in providing this information each period, management must use their private information about the firm's profitability prospects. Thus, accounting measurement of tax carryforwards is another way of providing a management earnings forecast. In analyzing the role of carryforwards in valuation, we distinguish between two conflicting effects. First, deferred taxes from carryforwards represent future tax savings; hence, they should be valued positively as assets. In contrast, the existence of tax carryforwards may signal a higher likelihood of future losses, which would have a negative effect on expected earnings and share prices.
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|Date of creation:||1998|
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