Auditor industry expertise and the predictive power of the deferred tax valuation allowance

Zhuoli Axelton, Jeffrey Gramlich and M. Kathleen Harris

Accounting and Finance, 2025, vol. 65, issue 1, 323-364

Abstract: This paper investigates whether auditor industry expertise influences the predictive value of management earnings forecasts embedded in the deferred tax asset valuation allowance (VA). VAs depend on management's forecast of future taxable earnings and can provide investors with information about expected changes in future earnings. We find that audit industry expertise improves the predictive power of the VA, but there is no evidence of a similar effect for tax‐specific industry expertise. These results are robust to entropy balancing and quasi‐experimental analyses around auditors becoming industry experts.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:bla:acctfi:v:65:y:2025:i:1:p:323-364

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