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

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

JRFM, 2025, vol. 18, issue 7, 1-25

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.

Keywords: deferred tax valuation allowance; ownership change limitation; taxation (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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