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Market Perception

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  • 1. Accounting and Finance 49 (2009) 645–673 Market’s perception of deferred tax accruals Cheryl Chang, Kathleen Herbohn, Irene Tutticci UQ Business School, University of Queensland, St Lucia, 4072, AustraliaAbstractThis study investigates the value relevance and incremental information contentof deferred tax accruals reported under the ‘income statement method’ (AASB1020 Accounting for Income Taxes) over the period 2001–2004. Our findings sug-gest that deferred tax accruals are viewed as assets and liabilities. We documenta positive relation between recognized deferred tax assets and firm value usingthe levels model, while the results from the returns model suggest that deferredtax liabilities reflect future tax payments. The balance of unrecognized deferredtax assets provides a negative signal to the market about future profitability,particularly for companies from the materials and energy sectors and loss-makers.Key words: Deferred tax asset; Deferred tax liability; Income statement method;Value relevanceJEL classification: G14, M41doi: 10.1111/j.1467-629X.2009.00307.x1. Introduction In many countries, accounting for deferred taxes is a controversial issue andAustralia has proven to be no exception. Possibly the most contentious issuehas been the replacement of the income statement method prescribed by theAustralian Accounting Standards Board (AASB) in 1020, Accounting forIncome Taxes (1989), with the balance sheet method prescribed in AASB 112,We would like to thank participants of seminars at the Australian National University,University of Technology, Sydney, the University of Southern Queensland and Queens-land University of Technology as well as attendees of the 2006 Accounting & FinanceAssociation of Australia and New Zealand conference in Wellington, New Zealand.In particular, we would like to recognize the insightful comments of Allen Craswell,Jane Hamilton, Steve Huddart and Peter Wells. The research assistance of Laurel Yu andAkihiro Omura is also gratefully acknowledged.Received 24 September 2007; accepted 17 March 2009 by Robert Faff (Editor).Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 2. 646 C. Chang et al./Accounting and Finance 49 (2009) 645–673Income Taxes.1 Such change was first flagged in the mid-1990s as a way tomake accounting for tax consistent with the Australian conceptual framework.2Tax assets and liabilities recognized under the income statement method wereargued to be ‘hypothetical’ in comparison with the ‘real’ assets and liabilitiesrecognized under the balance sheet method. However, critics questionedwhether the tax deferrals recognized under the balance sheet method would beany more ‘real’ (e.g. Sidhu, 1996). The conceptual debate remained unresolved and ultimately the balance sheetmethod was introduced as part of the AASB’s policy of adopting Australianequivalents of International Financial Reporting Standards (AIFRS). Theunresolved nature of the debate is of concern because it is important to under-stand the consequences of adopting AIFRS. One such consequence may well bethe potential loss of information provided by tax deferrals recognized using theincome statement approach. Consequently, in the present paper we examine themarket’s perception of the relevance of deferred tax assets and liabilities reportedby Australian companies under the income statement method specified by AASB1020. As part of this investigation, we consider whether current period tax accrualshave incremental information content to reported earnings. Finally, we extendour analysis to an investigation of the relevance of the unrecognized tax assetsdisclosed in the notes to the accounts. These are the items that fail to meet therecognition criteria specified in AASB 1020. Assets arising from timing differencesare required to meet the criterion of ‘beyond reasonable doubt’ while assets fromtax losses must be ‘virtually certain’ to be offset in the future.3 Overall, our study is important because there has been no direct investigationof the relevance of deferred tax assets recognized using the income statementmethod since the US standard APB Opinion no. 11 required firms to disclose1 AASB 112 is the Australian equivalent of IAS 12 and superseded AASB 1020 fromJanuary 2005.2 The balance sheet method was first raised in Discussion Paper no. 22 Accounting forIncome Tax issued by the Australian Accounting Research Foundation. AASB 1020 wassubsequently reissued in December 1999 to prescribe the balance sheet method. Voluntaryadoption of the balance sheet method was proposed prior to the implementation of theinternational standards. As few firms took up this method, we excluded firms using thebalance sheet method from our sample.3 Recognition of deferred tax losses under the income statement method of AASB 1020required firms to be ‘virtually certain’ there would be sufficient future taxable income tooffset the benefit carried forward. This requirement is stringent compared with other juris-dictions. For example, the recognition requirement of UK standard FRS 19 Deferred Taxfor deferred tax assets was that they must be ‘recoverable’ and did not distinguish betweencarry forward losses and other timing differences. ‘Recoverable’ was defined as ‘morelikely than not’. The International Accounting Standard IAS12 Income Taxes requiresrecognition of deferred tax assets and losses when the associated benefits are ‘probable’ toarise. The US requirements of SFAS no. 109 recognize deferred tax assets if the realizationof benefits is ‘more likely than not’ to occur.Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 3. C. Chang et al./Accounting and Finance 49 (2009) 645–673 647net deferred tax liabilities without separate disclosure of deferred tax assets.Evidence on the value of deferred tax assets instead comes from settings whichuse the balance sheet method. Subtle differences in the Australian institutionalsetting relative to other jurisdictions allow us to examine deferred tax assetsand deferred tax liabilities separately. There have only been two published Australian studies of tax accounting;these are by Sidhu and Whittred (1993, 2003). The first examined the introductionof deferred tax accounting in Australia in the early 1970s, and the second therole of political costs in the deferred tax policy choices of Australian firms. Ourstudy is the first Australian study to consider the value relevance of tax accrualsand provides a more recent and comprehensive assessment of the consequencesof discontinuing the income statement approach.4 As such, we provide a startingpoint for future investigation of the relevance of deferred tax accruals in Australiasince accruals recognized under the income statement method represent a subsetof accruals that will arise under the balance sheet approach now required byAASB 112.5 In fact, the more restrictive requirements of the income statementmethod provide a base value for items which if found value relevant during theperiod of our study should translate to the new setting.6 Evidence from US research suggests that deferred taxes provide value-relevantinformation under the income statement method in APB Opinion no. 11 (Givolyand Hayn, 1992; Chaney and Jeter, 1994) and more recently, the balance sheetmethod in SFAS no. 109 (Amir et al., 1997; Ayres, 1998; Amir and Sougiannis,1999). In general, evidence suggests that deferred tax liabilities are viewed bythe market as comparable to other reported liabilities, although the relation maybe tempered by recurring items that have little likelihood of reversal. Similarly,prior research suggests that reported deferred tax assets represent future taxsavings, although the relation may be diminished because recognition of deferred4 At the time this study was conducted insufficient time had lapsed since the implementation ofAASB 112 to allow the collection of a reasonably sized sample which would afford a compari-son of the balance sheet and income statement methods.5 The income statement method recognizes timing differences between taxable income orloss and accounting profit or loss as deferred tax assets or liabilities. The balance sheetmethod of tax accounting recognizes temporary differences between the carrying amountof an asset or a liability and its tax base as deferred tax accruals. Consequently, thebalance sheet method results in an increase in items giving rise to deferred tax assets andliabilities.6 For example, AASB 112 (para. 34) allows the recognition of a deferred tax asset for thecarry-forward of unused tax losses to the extent that it is ‘probable’ that future taxableincome will be available against which the losses can be used. In contrast, AASB 1020 spec-ifies that a deferred tax asset is to be recognized when there is assurance ‘beyond anyreasonable doubt’ that sufficient benefits will be earned in the future to offset this asset.Furthermore, when a deferred tax asset arises from a tax loss carried forward, the asset canonly be recognized if it is ‘virtually certain’ that sufficient taxable income will be earned.Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 4. 648 C. Chang et al./Accounting and Finance 49 (2009) 645–673tax assets due to losses could be interpreted as a signal of future losses. Researchershave not considered the market’s perception of unrecognized tax assets carriedforward. Therefore, the nature of the relation is undecided. In contrast, the balancescould be perceived as representing future tax savings. This is particularly thecase given that the stringent recognition criterion for losses does not reflectAustralian tax legislation which allows losses to be carried forward indefinitely.On the other hand, the balance of unrecognized deferred tax assets may be negativelyinterpreted as a signal of future losses. Prior research findings on the incremental information content of currentperiod tax accruals have been mixed. There is some evidence that these deferralsrepresent increases and decreases in balance sheet assets and liabilities whichreflect future tax savings or payments (Amir et al., 1997; Chaney and Jeter, 1994).As such, research suggests that the market will value increases in deferred taxliabilities negatively and increases in deferred tax assets positively. In an Austra-lian context, we particularly expect this relation to hold for deferred tax assetsfrom losses because of AASB 1020’s strict recognition criterion of tax benefitsbeing ‘virtually certain’. However, there is other evidence that current periodaccruals convey information signals to the market about current and futureprofitability (Givoly and Hayn, 1992; Chaney and Jeter, 1994). Of particularimportance are the components of the tax accruals since there is evidence that themarket discounts the value of deferred tax liabilities based on their likelihood ofsettlement. This results in recurring items such as depreciation having no valuerelevance for a growing firm. Limitations on the required disclosures for the income statement method donot allow us to identify the components contributing to current period accruals.Instead, by reconstruction we identify the net change in current period deferredtax assets (distinguishing between timing differences and carry forward taxlosses), and deferred tax liabilities. We also include any current period changeto the unrecognized tax assets disclosed in the accounts. A random sample of 300 firms is selected from the top 1000 companies (bymarket capitalization) listed on the Australian Stock Exchange in 2002. Dataare collected for the 2002, 2003 and 2004 financial years. These years representthe period just prior to the implementation of the balance sheet method (AASB112). The sample period also overlaps with tax consolidation. In 2002, the startingpoint for our study, Australian accounting standards did not allow the netting ofdeferred tax assets and liabilities at the group level as taxable income wasdetermined at the individual firm level. However, changes to the tax legislationallowed firms to elect consolidation for tax purposes for financial periods ending30 June 2003. Less than half of our sample firms took up this option in the latter2 years of the sample period (i.e. 2003 and 2004). As a result, we are able toexamine deferred tax assets and deferred tax liabilities separately for firms andyears in which there was no tax consolidation and then compare this analysiswith the net tax assets and liabilities reported by tax consolidators in the latterpart of our sample period.Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 5. C. Chang et al./Accounting and Finance 49 (2009) 645–673 649 We use both levels and returns models to test our expectations. The modelsdistinguish between profit-making and loss-making years on the basis thatexpectations of coefficients on the financial variables in these models differdepending on whether firms are making a profit or loss. The rationale for this isthat losses are not expected to persist (Hayn, 1995). Using the levels model, we find that the balance of deferred tax assets ispositively and significantly associated with firm value which indicates that themarket perceives these items as assets of the firm. This result holds for all firms,irrespective of whether they are profit-making or loss-making, or whether theyelected to adopt tax consolidation. The result is consistent with prior researchand our expectation that deferred tax assets are perceived to represent futuretax savings. The results for deferred tax liabilities are generally insignificant, indi-cating that the market views the deferred tax liabilities as having little relation-ship to future tax payments. Based on prior research, we infer from this resultthat the market expects the major sources of the deferred tax liabilities to be recur-ring timing differences. The one exception is the significant and negative associa-tion we document between deferred tax liabilities and price for loss-making taxconsolidators. Typically, these firms have poor financial performance and, hence,are limited in their capacity for growth. The market may perceive that the deferredtax liabilities for these firms are therefore more likely to reverse in the future andso values them as financial liabilities, unlike the remaining firms in our sample. We document a negative relation between market value and the balance ofunrecognized deferred tax assets disclosed in the notes to the accounts. This resultis consistent with our expectations that failure to meet the recognition criteriasends a negative signal to the market about the future prospects of the firm. There is an industry effect apparent using the levels model which has notbeen documented in prior research. When we limit the sample to companiesfrom the materials and energy sectors, deferred tax liabilities are found to besignificantly negatively associated with price. This is consistent with the marketperceiving the deferred tax liability to be due to non-recurring items, thus makingfuture tax payments probable. In contrast, there is no result for deferred tax assetsand unrecognized deferred tax assets are negatively associated with firm value.When taken together, this suggests that market participants have reservationsthat these firms will ever benefit from either their recognized or unrecognizeddeferred tax assets. The results from the returns model provide a slightly different perspective.The most persistent result here is found on the incremental value relevance ofthe change in the balance of deferred tax liabilities. A net increase in deferredtax liabilities is negatively associated with a firm’s return indicating that themarket expects lower cash flows in the future. These results are consistent withprior research and with the levels model results for loss firms or firms from thematerials and energy sectors. For deferred tax assets, our results suggest thatthe source of the deferred tax asset is an important factor. That is, we find norelation between returns and changes in recognized deferred tax assets fromÓ The AuthorsJournal compilation Ó 2009 AFAANZ
  • 6. 650 C. Chang et al./Accounting and Finance 49 (2009) 645–673timing differences. However, an increase in recognized deferred tax assets fromcarry-forward losses is found to be positively associated with returns. The latterresult on recognized deferred tax assets due to losses is consistent with priorresearch and the levels model results. On balance, it seems that the market perceivesdeferred tax assets as representing likely future tax savings. Finally, our results on the market’s perception of changes in unrecognizeddeferred tax assets are mixed. However, when viewed collectively, it appearsthat the market views adjustments to these amounts as a negative signal aboutthe future profitability of the firm. We find that this signal is particularly strongwhere firms are more likely to make losses as is the case for the materials andenergy sectors. Overall, our results suggest that the income statement method did indeedprovide market participants with information relevant to market value. Therefore,the discontinuation of this method has not been without cost. Also, deferred taxassets from losses as defined by the criteria of the income statement methodappear to provide signals to the market about future value that are particularlyrelevant to the materials and energy sectors. Future research will be able to considerthe usefulness of the additional disclosure provided by the balance sheet methodregarding the components giving rise to deferred tax assets and liabilities.7 The remainder of this paper is organized as follows. Section 2 outlines the hypothe-ses development, the methodology and sample are described in Section 3, andthe results are presented in Section 4. Concluding comments follow in Section 5.2. Market perception of deferred tax accruals We investigate the market’s perception of deferred tax assets and liabilities aswell as the information content of current deferrals. A summary of our testablepropositions is presented in Table 1 and subsequently discussed in Sections 2.1and 2.2.2.1. Value relevance of deferred tax assets and liabilities2.1.1. Deferred tax liabilities Under the income statement method outlined in the 1989 version ofAASB 1020, a deferred tax liability, labelled a ‘provision for deferred income7 For example, AASB 112 (para. 79) requires disclosure of the major components of taxexpense for the period including the amount of any deferred tax expense (income) relatingto the origination and reversal of temporary differences (para. 80(c)) and the amount ofbenefit arising from a previously unrecognized tax loss that is used to reduce deferred taxexpense (para. 80(e)). In contrast, these types of disclosures were not required by thesuperseded standard AASB 1020. To illustrate, very few of the sample firms in this studyseparately disclosed the changes in deferred tax assets due to timing differences.Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 7. C. Chang et al./Accounting and Finance 49 (2009) 645–673 651Table 1Summary of hypotheses and research expectationsHypotheses and Expectedresearch expectations relation DiscussionLevels model Hypothesis 1: – Market views as financial liabilities, although the relation may Deferred tax be tempered by recurring items (e.g. depreciation) with little liabilities chance of reversal Hypothesis 2: + Market views as assets representing future tax savings Deferred tax assets (measurement perspective), although the relation may be tempered because the recognition of deferred tax assets due to losses may be interpreted as a signal of future losses Hypothesis 3: ? The relation has not been considered in prior research. Ex ante Unrecognized analysis suggests two possibilities, focusing on unrecognized deferred tax assets deferred tax assets due to losses: Positive relation: Market views as assets representing future tax savings because tax losses can be carried forward indefinitely under Australian income tax legislation Negative relation: Market views as a signal of future losses, particularly if the balance is increasing over timeReturns modelCurrent deferrals of ? Prior research has identified two possibilities: deferred tax liabilities Negative relation: Market views as financial liabilities with increases valued negatively and decreases valued positively No specified relation: Market determines the value relevance from individual components of the adjustment. For example, the market discounts the value relevance of deferred tax liabilities based on the likelihood of their settlement (e.g. recurring items such as depreciation are not value relevant in a growing firm)Current deferrals of + Market views as assets representing future tax savings deferred tax assets with increases valued positively and decreases valued negatively. This is expected to be the case particularly for adjustments to deferred tax assets from losses because of AASB 1020’s strict recognition criterion of tax benefits being ‘virtually certainChange in unrecognised ? The relation has not been considered in prior research. Ex ante deferred tax assets analysis suggests two possibilities: Negative relation: Market views increases as signalling low expectations for future profitability and decreases as signalling high expectations for future profitability Positive relation: Market views the accounting recognition rule for deferred tax assets as restrictive and values changes in unrecognized balances as it would an asset of the firmÓ The AuthorsJournal compilation Ó 2009 AFAANZ
  • 8. 652 C. Chang et al./Accounting and Finance 49 (2009) 645–673tax’, is recognized when income tax expense exceeds income tax payable. Thisdifference can arise from two sources – revenues recognized in profit before taxin an earlier reporting period than they are included in taxable income; orexpenses that are deductible for tax purposes in one period but deferred foraccounting purposes until later periods. The deferred tax liability is recognizedwhen it is probable.8 There is disagreement as to the market’s perception of deferred tax liabilities.Some claim that the reliability of deferred tax liabilities is minimal because theliabilities bear little relationship to future tax payments (Lasman and Weil,1978; Chaney and Jeter, 1988, 1989; Defliese, 1991). In the case of recurringtiming differences (e.g. deferred taxes resulting from depreciation) the liabilityrecognized will likely not involve a probable future sacrifice of economic benefits.As long as a company is growing or at least maintaining its operating capacity,reversing differences are generally offset by equal or larger originating differences,with the result that the liability is not likely to be settled in the foreseeablefuture (Chaney and Jeter, 1988, 1989). Therefore, large deferred tax liabilities,a significant portion of which are unlikely to lead to future tax payments, wouldnot be expected to be considered liabilities of the firm or be relevant to a firm’svalue.9 However, empirical evidence from US studies suggests otherwise. The studiesshow that deferred tax liabilities are in fact regarded as financial liabilities by themarket (Beaver and Dukes, 1972; Givoly and Hayn, 1992; Amir et al.,1997; Ayres, 1998).10 A negative association has been documented betweensecurity returns and net deferred tax liabilities and changes therein that arerecognized under the income statement method (APB Opinion no. 11) (Beaverand Dukes, 1972; Givoly and Hayn, 1992).11 Therefore, it appears that deferred8 The term probable means that the chance of the future sacrifices of economic benefitswhen the timing difference reverses is more likely rather than less likely to occur.9 In fact, there is evidence from Australia, the USA and New Zealand that companies, onaverage, disclose deferred tax liabilities with positive long-term growth trends which sug-gests that permanent deferral of taxes is more likely to occur than their realization (Wise,1986; Bartholomew, 1987).10 The studies by Amir et al. (1997) and Ayres (1998) investigate deferred tax liabilities underthe balance sheet method (SFAS 109). In both studies, the results were consistent with inves-tors valuing deferred tax liabilities in a way similar to other balance sheet liabilities.11 Specifically, Beaver and Dukes (1972) found that unexpected stock returns are morehighly correlated with unexpected earnings measures that include tax deferrals than withunexpected earnings measures that do not. Adopting a different perspective, Givoly andHayn (1992) identified a positive association between stock returns and the reduction inthe deferred tax liability implied by the change in tax rate around the 1986 Tax ReformAct. More recently, Chaney and Jeter (1994) documented a negative association betweennet deferred tax liabilities and security returns.Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 9. C. Chang et al./Accounting and Finance 49 (2009) 645–673 653tax liabilities are perceived in the same way as other liabilities recognized onfirms’ balance sheets. We hypothesize that the Australian financial market also treats deferred taxliabilities reported under the income statement method as ‘real’ liabilities (referto Table 1). Specifically we predict that deferred tax liabilities are negativelyassociated with firm value. Hypothesis 1 stated in the alternate form is:H1: Deferred tax liabilities determined under the income statement method arenegatively associated with firm market value.2.1.2. Deferred tax assets A deferred tax asset, referred to as a ‘future income tax benefit’, is recognizedunder the income statement method when income tax payable exceeds incometax expense. This difference may arise from two sources – revenues included intaxable income in an earlier reporting period than they are recognized in profitbefore tax, or expenses recognized in the current period in profit before tax but notdeducted for tax purposes until a later period. The deferred tax asset is recognizedas an asset when there is assurance ‘beyond any reasonable doubt’ that sufficientbenefits will be earned in the future to offset this asset. Furthermore, when a deferredtax asset arises from a tax loss carried forward, the asset can only be recognizedif it is ‘virtually certain’ that sufficient taxable income will be earned. We draw upon indirect evidence from US studies of deferred tax assets recognizedunder SFAS no. 109 (balance sheet method) to inform our study. The main con-straint in doing so is the more stringent asset recognition rules applied by theincome statement method relative to the balance sheet method. We return to thisissue prior to stating the second hypothesis. The evidence from the US relates largely to tax assets arising from tax lossescarried forward. There are two conflicting effects that influence the relationbetween market values and deferred taxes from tax losses carried forward (Amirand Sougiannis, 1999). First, from a measurement perspective, it is argued thatlosses carried forward are perceived as an asset because they represent future taxsavings. Therefore, they are valued positively by investors (Amir and Sougiannis,1999; De Waegenaere et al., 2003). Alternatively, from an information perspectiveinvestors may interpret deferred tax losses as signals of future tax losses ratherthan as expected tax savings. Since firms with tax losses carried forward havealready experienced losses in the past, they are more likely to experience lossesin the future (Amir et al., 1997). Therefore, markets value deferred tax assetsnegatively because they signal probable future losses. Empirical evidence largely supports the measurement perspective. Evidencefrom Canadian markets suggests that tax losses carried forward enhance firmmarket value (Zeng, 2003). Similarly, the US study of Amir and Sougiannis(1999, p. 6) found ‘a strong positive relation between deferred taxes from carryforwards and share prices, suggesting that these carry forwards are valued asÓ The AuthorsJournal compilation Ó 2009 AFAANZ
  • 10. 654 C. Chang et al./Accounting and Finance 49 (2009) 645–673assets.’ However, Amir and Sougiannis (1999) also found evidence of the informa-tion effect since investors valued earnings and book values of firms with taxlosses carried forward less than firms without tax losses carried forward.12 We argue that the measurement perspective will dominate Australian markets.The income statement method (AASB 1020, 1989 version) only allows deferredtax assets from tax losses to be recognized when it is ‘virtually certain’ thatsufficient taxable income will be earned. Therefore, on balance we expect thatdeferred tax assets reliably communicate the likelihood of future tax savings.Similar reasoning can be applied to deferred tax assets arising from timing dif-ferences that may only be recognized if their realization is considered ‘beyondany reasonable doubt’. We hypothesize that under the income statement method (AASB 1020, 1989)investors in Australian financial markets will adopt a measurement perspectiveand treat deferred tax assets as assets that represent future tax savings. Specifically,we predict that deferred tax assets are positively associated with firm value (seeTable 1). Hypothesis 2 stated in the alternate form is:H2: Recognized deferred tax assets determined under the income statement methodare positively associated with firm market value.2.1.3. Unrecognized carried forward tax assets As we have discussed, the test for recognition of deferred tax assets is morestringent under Australian accounting standards than the recognition criteria fordeferred tax liabilities. This means that in some instances companies will discloseunrecognized deferred tax assets which do not meet the recognition criteria.The market’s perception of unrecognized tax assets has not previously beeninvestigated. We consider the nature of this relation in our study. On the one hand,the unrecognized portion of the deferred tax assets may be considered by themarket to be an asset of the firm. A substantial proportion of these unrecognizeddeferred tax assets arise from tax losses. The accounting recognition criterion isparticularly stringent in relation to deferred tax losses, whereas Australianincome tax legislation allows tax losses to be carried forward indefinitely.Therefore, the market may view the unrecognized portion of the deferred taxlosses to be an asset of the firm when it returns to profit, despite its accountingtreatment under AASB 1020. On the other hand, it is possible that the inabilityto meet the recognition criterion sends a negative signal to the market about the12 An earlier study by Amir et al. (1997), found that deferred tax accruals from losses werenegatively associated with stock prices, consistent with the information perspective. How-ever, the results of this study were called into question by Amir and Sougiannis (1999)who argued that Amir et al. (1997) did not distinguish between the measurement andinformation effects of carry-forwards on share prices, thereby resulting in a mis-specifiedvaluation model and biased results.Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 11. C. Chang et al./Accounting and Finance 49 (2009) 645–673 655firm’s ability to generate future profits. Furthermore, this signal is likely reinforcedif unrecognized deferred tax assets are increasing over time. Hence, we couldexpect the balance of unrecognized deferred tax assets, disclosed in the notes tothe accounts, to be negatively associated with the market value of the firm.There is only indirect empirical evidence on this issue from Amir et al. (1997).They find a negative (but insignificant) association between deferred tax lossesrecognized by US firms and share price. They interpret this finding as evidencethat the market does not expect these losses to be utilized. Given the unresolved nature of the relation between unrecognized tax assetsand firm value, our hypothesis is non-directional (see Table 1). Therefore,Hypothesis 3, stated in the alternate form, predicts an association betweenunrecognized tax assets and firm value.H3: Unrecognized deferred tax assets determined under the income statementmethod are associated with firm market value.2.2. Information content of current deferrals A number of different views have been adopted in prior research to make predic-tions about current period deferrals. In general, these views can be categorizedaround two themes which we consider in this study. The first view applies the spiritof the accounting standards and expects that these deferrals represent increasesand decreases in balance sheet assets and liabilities which reflect future tax savingsor payments. This is consistent with the measurement perspective previouslydiscussed. The second view is that current period accruals convey informationrelevant to the sustainability of current period earnings. Chaney and Jeter (1994)contend that if firms choose the most advantageous methods and rates availablefor tax purposes, then deferred taxes will reflect information about the underlyingaccounting choices made by firms. Hereafter, we refer to this as the additionalinformation view. We discuss the expectations that arise from both of theseperspectives but do not formally state hypotheses in this section. The reason forthis is that the different perspectives give rise to conflicting predictions. Table 1provides an overview of our expectations regarding current period accruals. If the measurement perspective is adopted for deferred tax liabilities, anincrease in this account should be negatively associated with firm value while adecrease would be positively valued. However, this association is tempered bythe likelihood of reversal in the near future which is argued to be fundamental tothe value relevance of deferred tax liabilities (Chaney and Jeter, 1994; Amiret al., 1997). In fact, Givoly and Hayn (1992) find that although the marketviews deferred taxes as a liability the value is discounted based on the timing andlikelihood of its settlement (refer to Table 1). The additional information perspective looks to the composition of deferredtax liabilities and argues that the components of deferred tax liabilities provideinformation about other underlying accounting treatments rather than future taxÓ The AuthorsJournal compilation Ó 2009 AFAANZ
  • 12. 656 C. Chang et al./Accounting and Finance 49 (2009) 645–673payments. Studies that decompose deferred tax liabilities into recurring andnon-recurring events find that the market attributes different values to them.Amir et al. (1997) show that the coefficient on components of deferred taxliabilities arising from depreciation and amortization charges are not value relevantwhere firms are growing because these accruals do not reverse. An alternateinterpretation is that the components of deferred tax accruals provide informationabout accounting changes and adjustments that are not disclosed elsewhere in theaccounts. Chaney and Jeter (1994) argue that their examination of tax componentssupports the view that deferred tax accruals tell the market something aboutearnings management rather than information about future tax payments. Overall,the additional information perspective does not predict a specific relation betweenadjustments to deferred tax liabilities and firm value. Rather, the relation dependson the firm’s context and individual components of the adjustment (see Table 1). Deferred tax asset accruals can arise from timing differences and carryforward tax losses. If deferred tax assets represent a balance sheet asset, thenirrespective of the source, we would expect increases in this asset to be positivelyvalued by the market and decreases negatively valued. This is consistent withthe measurement perspective. We also consider the possibility that deferred taxassets provide a signal to the market about the firm’s likely profitability (i.e.additional information view). We suggest that this perspective is most relevantfor recognized deferred tax assets from carry-forward losses. With a requirementof ‘virtually certain’ for recognition of tax assets due to losses, recognition providesa strong signal to the market of management’s expectations of reporting profitsin the near future. Therefore, an increase in the recognition of carry forwardlosses as a deferred tax asset is expected to be positively associated with returns.Applying the same reasoning, it would follow that a reduction in tax assets (fromcarry forward tax losses) is negatively associated with returns (refer to Table 1). In light of the strict recognition criteria for tax assets arising from timingdifferences (beyond reasonable doubt) and tax losses (virtually certain), thedisclosure in the notes of the amounts of deferred tax assets not recognized mayprovide a signal to the market about firms’ future prospects. Ideally, we wouldinvestigate the effect of changes in unrecognized tax assets due to carry forwardlosses and due to timing differences separately. However, the minimum disclosurerequirements of the income statement method make it difficult to isolate thesechanges for all of our sample firms. As a result, in this study we investigate theinformation content of cumulative changes in unrecognized deferred tax assetsdue to all items that do not meet the recognition criteria for deferred taxassets.13 Our expectation is that increases in unrecognized deferred tax assets arelikely to signal low expectations for future earnings resulting in a negative13 Only a proportion of sample firms provided sufficient disclosure to distinguish betweenchanges in unrecognized deferred tax assets due to tax losses and due to timing differ-ences. In other cases the disclosure was unclear. As a result, we maintain the sample sizeby not distinguishing between losses and other deferred tax assets here.Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 13. C. Chang et al./Accounting and Finance 49 (2009) 645–673 657association between unrealized deferred tax assets and a firm’s market value.On the other hand, if the market views the accounting rule as restrictive in itsapplication, then unrecognized deferred tax assets may still be seen by the market asan asset of the firm (see Table 1).3. Sample and methodology3.1. Sample selection A random sample of 300 companies was selected from the top 1000 companies(by market capitalization) listed on the Australian Stock Exchange in 2002. Dataare collected for each company for the years 2002–2004. In forming the finalsample, 126 companies were excluded for the following reasons.1. Eight banks and one insurance company were excluded from the sample due to the industry’s highly regulated nature.2. Nineteen early adopters of the balance sheet method of deferred tax accounting were excluded from the sample.3. Sixty-four firms were excluded due to missing price or financial statement data.4. One company was deleted due to its suspended status; three trust companies were deleted because these companies are not liable for income tax; and an additional three pooled development funds that enjoy special tax concessions were also deleted.5. Twenty-eight companies had no record of a deferred tax asset, deferred tax liability or unrecognized deferred tax assets in any of the sample years. The final sample comprises 173 companies that recognized deferred taxassets and liabilities or disclosed unrecognized deferred tax assets in at leastone of the financial years 2002–2004. The resultant sample is an unequal paneldata set of 478 firm-years. Data for market value, book value, total assets and netincome were downloaded from the Aspect FinAnalysis database. The deferredtax information was hand collected from the annual reports available from theConnect4 database. Annual reports missing from Connect4 were obtained fromthe Aspect FinAnalysis database. The industry concentration of the companies is presented in Table 2. Thesample comprises companies from 10 different industry sectors. The sample ishighly concentrated in the materials and energy sectors, with 57 companies outthe total of 173 located in these sectors.14 It is likely that an industry effect mayhave a potential confounding effect for the regression models used in this study.We include industry controls in the models and undertake additional analysis tounderstand the impact of industry on our results.14 These sectors represent the sectors from which the resource sector is drawn. Theresource sector represents a large component of the Australian market and the character-istics of these firms are collectively quite different from firms in other industries. Forty ofthe 48 companies in our sample from the materials sector are resource companies.Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 14. 658 C. Chang et al./Accounting and Finance 49 (2009) 645–673Table 2Industry classificationGICS two-digit sector Number of companiesEnergy 9Materials 48Industrials 24Consumer Discretionary 18Consumer Staples 5Health Care 15Financials 25Information Technology 22Telecommunication Services 3Utilities 4Total 173A total of 173 companies are included in the sample over the 2002–2004 sample period. Industryclassification is based on the Global Industry Classification Standard (GICS) classifications.3.2. Research design Our analysis is conducted using both levels and changes models. The levelsmodel is used to test Hypotheses 1–3 which take a measurement perspectiveand predict that the market perceives deferred tax assets and liabilities as if theywere assets and liabilities of the firm. The returns model is used to test theinformation content of current period adjustments to these items. The levelsmodel used in this study is specified as equation (1) and is loosely based on theOhlson (1995) valuation framework. Pit ¼ b0 þ b1 Xit þ b2 ABVit þ b3 DTLit þ b4 DTAit þ b5 UDTAit þ b6 Grit þ b7 Matit þ b8 Finit þ b9 LOSSit þ b10 LOSS ÃXit þ b11 LOSS ÃABVit þ b12 LOSS ÃDTLit þ b13 LOSS ÃDTAit þ b14 LOSS ÃUDTAit þ e1it ; ð1Þwhere Pit is the share price of company i 3 months after financial year end t. Shareprices and shares outstanding are obtained from the Australian Graduate Schoolof Management’s CRIF database. Xit is the reported net profit after tax andabnormal items less outside equity interests and preference dividends for companyi during the year t. ABVit is the book value of equity before deferred tax assets andliabilities and excluding outside equity for company i at the end of year t. DTLit isthe end-of-period recorded book value of deferred tax liabilities for company i.DTAit is the end-of-period recorded book value of deferred tax assets for company i.UDTAit is the balance of the carry forward deferred tax asset, for company i atthe end of year t, that does not meet the recognition criteria of the standard butÓ The AuthorsJournal compilation Ó 2009 AFAANZ
  • 15. C. Chang et al./Accounting and Finance 49 (2009) 645–673 659which is disclosed in the notes to the accounts. All of the accounting variablesare deflated by the number of shares outstanding 3 months after balance date. A number of controls are also included in the model. A measure of growth isincluded in the model since growth in assets is likely to be highly correlated withincreasing deferred tax liabilities arising from timing differences on depreciation(Chaney and Jeter, 1994). Omission of a growth variable in the model mayoverstate the coefficient on the deferred tax liability. We measure Grit as thepercentage growth in total tangible assets over the year.15 Industry controls areincluded in the model. An indicator variable, Mat, is used for materials andenergy sector companies with a value of one if company i comes from the GICSindustry group of materials (1510) or energy (1010), otherwise 0. Similarly, anindicator variable, Fin, is used for the financials industry with a value of one ifcompany i comes from the financials industry, otherwise 0. Selection of thesetwo controls was based on differences in the nature of the underlying assets,liabilities, revenues and expenses of firms in these industries compared withother firms as well as differences in industry regulatory requirements. The model also takes into account whether a firm earns a profit or loss in thefinancial year. A loss dummy variable, LOSS, is included in the model andinteracted with the other financial variables in the model. This specification ofthe model recognizes that the coefficients on the financial variables are likely todiffer for profit and loss firms. The rationale here is that although the marketexpects profits to persist, losses are not expected to persist in the future (Hayn,1995). This is reflected in an expectation that the coefficient on net profit willhave a value of greater than one for profit firms while the coefficient on lossesis likely to be statistically insignificant. For loss-making firms, value shouldload on the book value of equity instead. Hypothesis 1 predicts that b3 will be significantly less than zero, indicatingthat, on average, investors value deferred tax liabilities negatively under theincome statement method. An insignificant result on b3 would suggest thatinvestors generally do not view deferred tax liabilities as liabilities of the firm.Hypothesis 2 predicts that b4 will be significantly greater than zero, indicatingthat, on average, investors take a measurement perspective on deferred taxassets. Hypothesis 3 is non-directional. A significant result on b5 would indicatethat unrecognized deferred tax assets are associated with firm market valueeither as an unrecognized asset of the firm (positive coefficient) or as a signalof more losses in the future (negative coefficient). The returns model incorporated in this study is set out as equation (2). Priorresearch suggests that the valuation coefficients on the components of tax accruals15 We also use an alternative measure of growth in our sensitivity testing. We substitutethe growth in tangible assets with growth in net cash from investing activities. Our keyresults are substantively unchanged by the use of this alternative measure. The results forthis analysis have not been reported in this paper.Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 16. 660 C. Chang et al./Accounting and Finance 49 (2009) 645–673differ. However, reporting requirements under the income statement method donot allow us to identify the components underlying tax accruals. Disclosurerequirements allow us to identify changes to recognized deferred tax assets arisingfrom carry forward tax losses; therefore, we are able to decompose the deferredtax asset to this degree (i.e. deferred tax assets from carry forward losses anddeferred taxes assets from other items). However, there is insufficient disclosureunder the income statement method to decompose deferred tax liabilities. Rit ¼ c0 þ c1 NIa þ c2 DNIa þ c3 CDTLit þ c4 CDTATit þ c5 CDTALit it it þ c6 URDTAit þ c7 Grit þ C8 Matit þ c9 Finit þ c10 LOSSit þ c11 LOSSÃNIa it þ c12 LOSSÃDNIa þ c13 LOSSÃCDTLit þ c14 LOSS ÃCDTATit it þ c15 LOSSÃCDDTALit þ c16 LOSSÃURDTAit þ e2it : ð2ÞReturns (Rit) are measured as market adjusted returns. An annual raw return iscalculated for each firm using monthly price relatives. Similarly, a return on themarket is calculated using monthly market price relatives. The market-adjustedreturn is then calculated as the difference between the annual raw return for afirm and the matching market return for the period. Price relative data is collectedfrom the CRIF database. The beginning price relative is collected for the fourthmonth following balance date and the subsequent monthly price relatives arecollected for a 12 month period. The explanatory variables are deflated by the lagged market value of the firmmeasured 3 months after the start of the financial year. Net income (NIa) ismeasured after tax with the addition or subtraction of net timing difference andcurrent period carry forward tax loss amounts. DNIa is the change in NIa fromthe prior year. The current period net change in the balance of deferred tax liabilitiesis captured by CDTL. Similarly, the net change in the deferred tax assets fromitems other than losses is captured by CDTAT. The net change in the deferredtax losses reported as part of the recognized deferred tax asset is measured byCDTAL. The net change in unrecognized deferred tax assets is measured byURDTA. The control variables also included in the model are identical to thoseincluded in the levels regression. These variables control for growth, industryand reported losses. As with the levels model, the returns model distinguishesloss-making years from the rest of the sample to allow for the coefficients tovary due to any non-linearity arising in loss years.4. Results4.1. Descriptive statistics Summary statistics for the sample data are presented in Table 3. Statistics foryears in which firms make a profit and years in which they make a loss are presentedseparately in line with the approach taken in the regression analysis. Panel A ofÓ The AuthorsJournal compilation Ó 2009 AFAANZ
  • 17. C. Chang et al./Accounting and Finance 49 (2009) 645–673 661Table 3 presents statistics for the 256 firm-year observations with a profit andthe 222 firm-year observations with a loss used in the levels regression. PanelB presents descriptive statistics for the 175 firm-year observations with a profitand the 182 firm-year observations with a loss used in the returns model. Thereduction in the sample for the returns regression is due to insufficient disclosureby firms regarding the annual incremental changes in deferred tax accruals. Inthese firm-years we were unable to work out the net change in any or all of thefollowing: deferred tax liabilities, deferred tax assets from losses, or deferredtax assets from other items. Outliers are identified at the univariate level, andextreme values are winsorized. The summary statistics for the levels model sample are reported in Panel Aof Table 3. Deferred tax liabilities and recognized deferred tax assets are, onaverage, higher for profit firms than for loss firms, while the balance ofunrecognized deferred tax assets is, on average, higher in loss years than inprofit years. The median growth in tangible assets for profit firms is 12 per centwhile for loss-makers median growth is –3 per cent. The overall poor financialperformance of loss firms relative to profit firms suggests that the former likelyhave a history of losses. Materials and energy sector companies were morelikely to be loss makers with 45 per cent of the loss-making sample representingthese sectors (only 23 per cent of the profit-making sample comprises materialsTable 3Descriptive statisticsPanel A: Levels model (n ¼ 478)Profit firm-years (n ¼ 256) P X ABV DTL DTA UDTA GrMean 2.48 0.171 1.300 0.061 0.045 0.047 33%Median 1.46 0.106 0.754 0.013 0.016 0.000 12%Minimum 0.03 0.000 –0.032 0.000 0.000 0.000 –74%Maximum 13.20 1.100 8.400 0.500 0.290 1.000 400%Standard deviation 2.73 0.205 1.691 0.109 0.065 0.146 72%Materials & Energy 23% FY 2002 31%Finance 20% FY 2003 34%Tax consolidators 30% FY 2004 35%Loss firm-years (n ¼ 222) P X ABV DTL DTA UDTA GrMean 0.34 –0.071 0.197 0.004 0.006 0.070 26%Median 0.17 –0.023 0.072 0.000 0.000 0.021 –3%Minimum 0.01 –0.620 –0.488 0.000 0.000 0.000 –93%Maximum 2.76 0.000 3.319 0.297 0.290 1.000 400%Standard deviation 0.46 0.129 0.421 0.024 0.033 0.165 100%Materials & Energy 45% FY 2002 40%Finance 7% FY 2003 34%Tax consolidators 13% FY2004 26%Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 18. 662 C. Chang et al./Accounting and Finance 49 (2009) 645–673Table 3 (continued)Panel B: Returns model (n ¼ 357)Profit firm-years (n ¼ 175) R NI a DNI a CDTL CDTAT CDTAL URDTA GrMean 0.28 0.142 0.135 0.007 0.004 0.001 –0.023 31%Median 0.14 0.084 0.031 0.000 0.001 0.000 0.000 14%Minimum –0.88 –0.045 –0.086 –0.208 –0.024 –0.069 –2.171 –73%Maximum 4.02 2.211 2.965 0.215 0.060 0.129 0.088 400%Standard deviation 0.69 0.207 0.356 0.033 0.009 0.014 0.169 60%Materials & Energy 27% FY 2002 25%Finance 16% FY 2003 38%Tax consolidators 29% FY 2004 37%Loss firm-years (n ¼ 182) R NI DNI CDTL CDTAT CDTAL URDTA GrMean 0.24 –0.393 –0.006 –0.002 0.001 0.000 –0.004 27%Median –0.08 –0.182 –0.014 0.000 0.000 0.000 0.000 –2%Minimum –1.04 –3.000 –4.000 –0.254 –0.026 –0.181 –1.166 –93%Maximum 5.00 –0.001 2.652 0.061 0.077 0.062 1.209 400%Standard deviation 1.06 0.539 0.716 0.020 0.009 0.016 0.171 104%Materials & Energy 50% FY 2002 35%Finance 4% FY 2003 37%Tax consolidators 12% FY 2004 28%P is the share price 3 months after financial year-end. X is the reported net profit after tax and abnor-mal items less outside equity interests and preference dividends. ABV is the book value of equitybefore deferred tax assets and liabilities and excluding outside equity for company. DTL is the end-of-period book value of deferred tax liabilities. DTA is the end-of-period book value of deferred taxassets. UDTA is the balance of the unrecognized deferred tax asset. All of the accounting variablesare deflated by the number of shares outstanding 3 months after balance date. Gr is the 1 year per-centage growth in total tangible assets. R is the market adjusted return over the year. NIa is after-taxincome with net timing difference and current period carry forward tax loss amounts added orsubtracted back. DNIa is the change in NIa. The current period net change in deferred tax liabilitiesis CDTL. The net change in deferred tax assets from items other than deferred tax losses is CDTA.Deferred tax losses reported as part of the deferred tax asset are CDTAL. URDTA is the current per-iod amount of unrecognized deferred tax assets disclosed in the notes to the accounts. All variablesare deflated by the market capitalization of the firm 3 months after the start of the financial year (FY).and energy sector companies). In contrast, companies from the financial industrywere more likely to be profitable comprising 20 per cent of the profit sampleand 7 per cent of the loss sample. Our sample period encompasses the introduc-tion of the voluntary tax consolidation regime for financial periods ending on30 June 2003. Of our sample, there were 22 initial adopters in 2003 whichincreased to 82 firms in 2004. The summary statistics in Panel A indicate thatprofitable firms were more likely to adopt tax consolidation than loss-makers(30 per cent of profit firms as compared with 13 per cent of loss firms). The sample for the returns model comprises a greater number of loss years(182 firm-years) than profit years (175 firm-years). Although the average returnÓ The AuthorsJournal compilation Ó 2009 AFAANZ
  • 19. C. Chang et al./Accounting and Finance 49 (2009) 645–673 663for the two groups was similar (Rprofit ¼ 28 per cent; Rloss firms ¼ 24 per cent),the median returns reflect a different picture at 14 per cent and –8 per cent,respectively. The average net amount of deferred tax accruals recognized each yearis small with the median levels being around zero. As can be expected there are,on average, larger net increases in recognized deferred tax assets from timingdifferences and tax losses for profitable firms relative to loss firms. Also, the averagenet change in the unrecognized deferred tax assets for profit firms is negative,suggesting that these items are likely being brought to account. Interestingly,the average change for the loss-makers is also negative for this item. If thesefirms are recognizing these deferred tax assets it would seem to contradictstandard setter’s expectations and may be an indicator of potential earningsmanagement.16 Pearson correlations are computed for the dependent and independent variablesin both the levels and returns regressions, and are reported in Table 4. Panel Ashows the correlation coefficients for the variables used in the levels model.The figures reveal a high level of correlation between many of the variables.This is likely to lead to problems of multicollinearity in the model. Panel Bshows the correlations for the returns model which are lower, suggesting thatmulticollinearity is less likely to be an issue. Therefore, findings from thereturns model that corroborate our results from the levels model will give usconfidence that our interpretation is not being unduly impacted by multicollinearity.4.2. Deferred tax liabilities and assets The results of testing Hypotheses 1–3 are documented in Table 5. To controlfor potential problems arising from heteroscedacity and serial correlation, weuse a number of corrective measures. Our model incorporates cross-sectionalrandom effects and Whites corrected standard errors and covariances. In sensitivityanalysis (not reported in the paper) we include dummy year variables and findno change to our inferences. Table 5 presents the results of the pooled sample.The results for the full sample are reported in the first column of the table. Theanalysis is re-run separately for firms and years where tax consolidation is notused to control for any potential confounding effects. The results for these subsetsof the sample are presented in the last two columns of the table. For the fullsample, the results on net income and book value are positive and statisticallysignificant. Furthermore, the magnitude of the coefficients on net income andbook value are theoretically consistent with, and similar to prior research.Interaction of these variables with the loss dummy reveals that the coefficient onearnings reduces when the firm makes a loss. This is consistent with expectations.16 This is consistent with the findings of Herbohn et al. (2008). They find that managersuse unrecognized deferred tax assets due to losses to manage earnings upward when pre-tax earnings are below the median analyst forecast and historical earnings levels.Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 20. 664 C. Chang et al./Accounting and Finance 49 (2009) 645–673Table 4Pearson correlation matricesPanel A: Levels model variables P X ABV DTL DTA UDTA GrP 1.00 0.81 0.87 0.70 0.68 –0.09 –0.04X 1.00 0.72 0.62 0.54 –0.24 0.02ABV 1.00 0.74 0.66 –0.05 –0.06DTL 1.00 0.59 –0.07 –0.05DTA 1.00 –0.11 –0.07UDTA 1.00 –0.02Gr 1.00Panel B: Returns model variables R NI a DNI a CDTL CDTAT CDTAL URDTA GrR 1.00 –0.05 0.16 0.10 0.04 0.08 0.08 0.07NIa 1.00 0.49 0.23 0.13 0.18 –0.54 0.12DNIa 1.00 0.18 0.02 0.14 –0.34 0.00CDTL 1.00 0.23 0.64 –0.01 0.22CDTAT 1.00 0.06 –0.05 0.09CDTAL 1.00 –0.01 0.19URDTA 1.00 –0.05Gr 1.00P is the share price 3 months after financial year-end. X is the reported net profit after tax and abnor-mal items less outside equity interests and preference dividends. ABV is the book value of equitybefore deferred tax assets and liabilities and excluding outside equity for company. DTL is the end-of-period book value of deferred tax liabilities. DTA is the end-of-period book value of deferred taxassets. UDTA is the balance of the unrecognized deferred tax asset. All of the accounting variablesare deflated by the number of shares outstanding 3 months after balance date. Gr is the 1 year per-centage growth in total tangible assets. R is the market adjusted return over the year. NIa is after-taxincome with net timing difference and current period carry forward tax loss amounts added or sub-tracted back. DNIa is the change in NIa. The current period net change in deferred tax liabilities isCDTL. The net change in deferred tax assets from items other than deferred tax losses is CDTA.Deferred tax losses reported as part of the deferred tax asset are CDTAL. URDTA is the current per-iod amount of unrecognized deferred tax assets disclosed in the notes to the accounts. All variablesare deflated by the market capitalization of the firm 3 months after the start of the financial year.Growth in tangible assets is only statistically significant for the tax consolidationfirms with a coefficient of 0.055 (p < 0.001). The predictions of Hypothesis 1 are tested by the direction and significanceof the coefficient on DTL. Our results for Hypothesis 1 are mixed. For the fullsample and firms that do not use tax consolidation, the coefficient on thedeferred tax liability is statistically insignificant which does not support thepredictions of Hypothesis 1. This result does not alter when DTL is interactedÓ The AuthorsJournal compilation Ó 2009 AFAANZ
  • 21. C. Chang et al./Accounting and Finance 49 (2009) 645–673 665Table 5Levels regressions using unequal panel data and Generalised Least Sequares (GLS) Pit ¼ b0+b1Xit+b2ABVit+b3DTLit+b4DTAit+b5UDTAit+b6Grit+b7Matit+b8 Finit+b9LOSSit + b10LOSS*ABVit+b12LOSS*DTLit+b13LOSS*DTAit+b14LOSS*UDTAit+e1it. Cross-sectional random effects and White corrected standard errors Full sample Excluding tax consolidators Tax consolidatorsIntercept 0.486 0.557 0.315t-statistics 4.976** 3.875** 7.123**X + 5.090 5.984 5.498 6.830** 6.000** 6.865**ABV + 0.702 0.575 0.778 9.436** 6.210** 29.567**DTL – –0.074 1.275 –1.112 –0.033 0.611 –0.546DTA + 5.814 2.649 7.646 2.105* 2.006* 23.982**UDTA –0.163 –1.972 –0.708 –0.359 –3.471** –6.565**Gr 0.021 –0.002 0.055 0.906 –0.074 2.733**Mat –0.316 –0.274 –0.337 –11.387** –4.468** –2.454*Fin –0.094 –0.027 –0.374 –0.931 –0.527 –70.995**LOSS –0.126 –0.211 0.068 –2.638** –4.411** 3.150**LOSS*X –5.472 –6.389 –5.278 –5.931** –5.606** –2.926**LOSS*ABV + 0.037 0.114 0.106 0.706 4.436** 104.617**LOSS*DTL 0.235 –0.524 –64.288 0.165 –0.236 –2.529*LOSS*DTA –1.653 0.063 3.918 –0.628 0.021 0.918LOSS*UDTA 0.362 1.512 1.170 0.989 1.485 1.733*n 478 374 104Cross-sections 173 172 84Adjusted R2 0.792 0.803 0.853F-statistic 130.7** 109.7** 43.8***Indicates significance at p < 0.10 and **indicates p < 0.01. P is the share price 3 months afterfinancial year end. X is the reported net profit after tax and abnormal items less outside equity inter-ests and preference dividends. ABV is the book value of equity before deferred tax assets and liabili-ties and excluding outside equity for company. DTL is the end-of-period book value of deferred taxliabilities. DTA is the end-of-period book value of deferred tax assets. UDTA is the balance of theunrecognized deferred tax asset. All of the accounting variables are deflated by the number of sharesoutstanding 3 months after balance date. Gr is the 1 year percentage growth in total tangible assets.Two industry control dummy variables are included in the model: Mat takes a value of 1 for firms inthe energy and materials sectors while Fin takes the value of 1 for firms from the financial sector. Adummy variable capturing loss years, LOSS, is included in the model and interacted with the keyfinancial variables to allow for differences on the coefficients of profit versus loss-making firms. Themodel is run using a Swamy and Arora estimate of component variances.Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 22. 666 C. Chang et al./Accounting and Finance 49 (2009) 645–673with LOSS. Therefore, unlike prior studies by Beaver and Dukes (1972), Givolyand Hayn (1992), Amir et al. (1997) and Ayres (1998), we do not find that themarket views deferred tax liabilities as financial liabilities. Instead, our findingsare consistent with Chaney and Jeter (1988, 1989), Defliese (1991) and Lasmanand Weil (1978), who argue that as long as a company is growing or at leastmaintaining its operating capacity, deferred tax liabilities arising from recurringitems are unlikely to reverse and, hence, are not viewed as liabilities by marketparticipants. Therefore, we infer from our result on DTL that the market expectsthe major source of these deferred tax liabilities to be timing differences arisingfrom depreciation of non-current assets. Our results for Hypothesis 1 changewhen we focus on loss-making, tax-consolidating companies. The coefficienton DTL is large and statistically significantly negative (–64.288) at less than1 per cent. This indicates that for this subset of firms the market views thedeferred tax liability as a liability of the firm. In light of the poor financialperformance of these firms, this result likely reflects a limit on the capacity forgrowth in these firms and, therefore, the expectation that DTLs of these firms,on average, are more likely to reverse in the future. We find strong support for the predictions of Hypothesis 2. The coefficientfor DTA in the full sample regression is statistically significantly positive(5.814) at the 1 per cent level. This result is robust to additional testing. Itpersists when we interact this variable with the dummy variable LOSS, as wellas when the sample is divided into non-tax consolidators and tax consolidators.This result is consistent with prior US research by Amir and Sougiannis (1999)and Zeng (2003) that documents a positive value for deferred tax assets. Overall,it suggests that the market perceives that future tax savings are likely to berealized. This result also confirms our expectation that in an Australian settingthe market views deferred tax assets from losses as reliably communicating thelikelihood of future tax savings, because of the strict recognition requirementof AASB 1020. Finally, for the full sample the coefficient on unrecognized deferred taxassets, UDTA, is statistically insignificant. However, when the sample is splitbetween firms that use tax consolidation and those that do not, the resultsbecome statistically significant for all firms. The coefficient on UDTA is –1.972for firms that do not consolidate for tax purposes and –0.708 for those that do.For both samples these coefficients are significant at less than 1 per cent. Thisprovides some support for Hypothesis 3 which predicts that the unrecognizedbalance of deferred tax assets is associated with market value. The negativedirection of this relation is consistent with our prediction that the inability ofthese accruals to meet the recognition criteria provides a signal about the futureprofitability (or lack thereof) of the firm. Given the high incidence of loss-making entities within our sample that arelocated in the materials and energy sectors and likely differences in the com-ponents underlying the tax accruals, we re-run our analysis separately for thesefirms. The results for this analysis are documented in Table 6. The results forÓ The AuthorsJournal compilation Ó 2009 AFAANZ
  • 23. C. Chang et al./Accounting and Finance 49 (2009) 645–673 667Table 6Levels regression: Materials and Energy versus other sectors Pit ¼ b0 + b1Xit + b2ABVit + b3DTLit + b4DTAit + b5UDTAit + b6Grit + b7LOSSit + b8LOSS*Xit + b9LOSS*ABVit + b10LOSS*DTLit + b11LOSS*DTAit + b12LOSS*UDTAit + e1it.Cross-sectional random effects modelwith White corrected standard errors Other sectors Materials and EnergyIntercept 0.464 0.009t-statistics 2.908** 0.144X + 5.163 4.721 3.540** 5.791**ABV + 0.701 0.790 10.048** 5.507**DTL – –1.697 2.064 –0.606 1.465DTA + 7.812 2.541 2.186* 1.012UDTA 0.107 –0.531 0.126 –9.948**Gr –0.002 0.059 –0.067 19.842**LOSS –0.183 0.077 –1.356 0.907LOSS*X –4.869 –6.866 –2.914** –9.679**LOSS*ABV + 0.176 –0.100 2.050* –0.573LOSS*DTL –0.104 –5.999 –0.049 –10.392**LOSS*DTA –1.461 2.045 –0.379 0.869LOSS*UDTA 0.724 –0.503 1.277 –3.052**n 317 161Cross-sections 116 57Adjusted R2 0.755 0.923F-statistic 82.3** 160.2***Indicates significance at p < 0.10 and **indicates p < 0.01. P is the share price 3 months afterfinancial year end. X is the reported net profit after tax and abnormal items less outside equity inter-ests and preference dividends. ABV is the book value of equity before deferred tax assets and liabili-ties and excluding outside equity for company. DTL is the end-of-period book value of deferred taxliabilities. DTA is the end-of-period book value of deferred tax assets. UDTA is the balance of theunrecognized deferred tax asset. All of the accounting variables are deflated by the number of sharesoutstanding 3 months after balance date. Gr is the 1 year percentage growth in total tangible assets.A dummy variable capturing loss years, LOSS, is included in the model and interacted with the keyfinancial variables to allow for differences on the coefficients of profit versus loss-making firms.Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 24. 668 C. Chang et al./Accounting and Finance 49 (2009) 645–673the non-mining sector firms are largely consistent with those of the full samplepresented in Table 5, with the main tax accrual result arising on the DTA. However,there is an industry effect apparent when we consider companies from the materialsand energy sectors separately. Prior research has not investigated possibleindustry effects on the market’s perceptions of deferred tax accruals. Hence, ourresults highlight the importance of industry context. In particular, we find thatthe result on the recognized deferred tax assets disappears, while the unrecog-nized deferred tax assets (UDTA) are negatively associated with firm value. Thecoefficient on UDTA is –0.531 (p < 0.001). In fact, the coefficient on UDTAbecomes even more negative when the firm reports a loss (increasing by –0.503,p < 0.001). This result is consistent with the market taking into account therisks associated with these sectors and assessing that it is very dubious thatthese firms will ever benefit from either their recognized or unrecognizeddeferred tax assets. It is likely that this result is due to the carry forward losscomponent of these assets. A further difference in the results for the materials and energy sectors isthat the coefficient on the deferred tax liability for loss-making mining firms isstatistically significantly negative (–5.999, p < 0.001). This result indicates thatfor these particular firms, the market perceives the deferred tax liability as a liabilityof the firm leading to future tax payments.4.3. Current tax deferrals In the second stage of our analysis, the information content of the net increasesand reversals of current period deferred tax accruals is tested using a returnsregression. The returns regressions are run with period fixed effects. As returnsmodels are less subject to problems of heteroscedacity we do not adjust for this inour analysis (Kothari and Zimmerman, 1995). As an extension to our study wepresent results for the full sample and also for the sample first with tax-consolida-tors removed and second with materials and energy sector companies removed.The results for these regressions are presented in three columns of Table 7. In Table 7, we observe that net income adjusted for tax accruals, NIa, is positivelyand significantly related to returns for all samples. However, the measure ofunexpected earnings, DNIa, does not yield significant findings. The controlvariables Gr and Mat, which measure growth and materials and energy sectormembership, are positively and significantly related to returns in a consistentmanner. The final statistically significant result is the interaction between theloss dummy variable and earnings. The coefficient on this variable is negativein all versions of the model and significant at a level of p < 0.01 in all cases. In reference to the current tax accruals, the current period change in DTL isnegatively and statistically associated with returns for the full sample and thesubsamples. This result is consistent with the findings of Beaver and Dukes(1972) and Givoly and Hayn (1992) and suggests that increases in deferred taxÓ The AuthorsJournal compilation Ó 2009 AFAANZ
  • 25. C. Chang et al./Accounting and Finance 49 (2009) 645–673 669Table 7Returns regression using an unequal panel model with period fixed effects Rit ¼ c0 þ c1 NIa þ c2 DNIa þ c3 CDTLit þ c4 CDTATit þ c5 CDTALit þ c6 URDTAit þ c7 Grit it it þ c8 Matit þ c9 Finit þ c10 LOSSit þ c11 LOSSÃNIa þ c12 LOSSÃDNIa þ c13 LOSSÃCDTLit it it þ c14 LOSS CDTATit þ c15 LOSSÃCDDTALit þ c16 LOSSÃURDTAit þ e2it : Ã Full sample Excluding tax consolidators Other sectorsIntercept –0.050 –0.130 –0.078t-statistics –0.495 –0.993 –0.757NI 1.418 2.276 1.946* 1.985* 2.276* 2.437DNI 0.552 0.058 0.298 1.678* 0.119 0.650CDTL –5.571 –6.683 –6.611 –2.040* –1.837* –1.817*CDTAT 8.209 11.166 7.553 1.091 1.038 1.011CDTAL 12.485 12.681 4.711 1.872* 1.354 0.399URDTA 2.432 –1.199 –3.647 3.606** –0.532 –1.342GROWTH 0.113 0.178 0.118 2.023* 2.539* 1.592Mat 0.302 0.318 NA 3.037** 2.689**Fin –0.021 –0.004 NA –0.128 –0.017LOSS –0.122 –0.034 –0.147 –0.952 –0.209 –1.004LOSS*NI –1.998 –2.899 –2.507 –2.747** –2.866** –3.079**LOSS*NI –0.108 0.423 0.143 –0.307 0.832 0.296LOSS*CDTL 7.799 10.832 –2.548 1.585 1.789* –0.277LOSS*CDTAT –3.734 –12.103 5.854 –0.332 –0.821 0.407LOSS*CDTAL –10.285 –12.954 1.066 –1.074 –1.062 0.054LOSS*URDTA –1.895 1.911 4.322 –2.281* 0.818 1.559n 357 284 219Cross-sections 146 141 94Adjusted R2 0.145 0.157 0.180F-statistic 4** 4** 4***Indicates significance at p < 0.10 and **indicates p < 0.01. R is the market-adjusted return over the year.NIa is after tax income with net timing difference and current period carry-forward tax loss amounts addedor subtracted back. DNIa is the change in NIa. Current period net change in deferred tax liabilities is CDTL.Net change in deferred tax assets from items other than deferred tax losses is CDTA. Deferred tax lossesreported as part of the deferred tax asset are CDTAL. URDTA is current period unrecognized deferred taxassets disclosed in the notes. All variables are deflated by the market cap 3 months after the start of thefinancial year. Mat is a dummy variable that equals 1 for energy and materials sectors firms while Fin takesthe value of 1 for financial sector firms. A dummy variable capturing loss years, LOSS, is included in themodel and interacted with the key financial variables to allow for differences on the coefficients of profitversus loss-making firms.Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 26. 670 C. Chang et al./Accounting and Finance 49 (2009) 645–673liabilities are viewed as reflecting future tax payments. Our result on DTL is notconsistent with the argument that the value relevance of changes in deferred taxliabilities is minimal because of the small likelihood of reversal in the near future(Lasman and Weil, 1978; Defliese, 1991; Chaney and Jeter, 1994). Interestingly,the returns model result differs from the finding in the levels regression, wherethe balance of deferred tax liabilities was only statistically significantly negativefor loss firms that were either tax consolidators or materials and energy firms.17It should be noted that the returns sample has more loss years than profit years,while the opposite is true for the levels model. This may have some impact onour findings. The second significant result from the returns model is that current periodadjustments to unrecognized deferred tax assets, URDTA, are positively andstatistically associated with returns for the full sample but this association reduceswhen the firm makes a loss as shown by the significantly negative coefficient onthe loss interaction term (LOSS*URDTA). The result is not robust across thesubsamples. Overall, these results are not consistent with our expectation thatincreases in unrecognized deferred tax assets likely signal low expectationsfor future earnings. Instead, the results suggest that the market perceives therecognition rule for deferred tax assets as restrictive in its application andaccordingly views current period increases in unrecognized deferred tax lossesas increases to the assets of the firm when the firm makes a profit. Interestingly, the returns model result on unrecognized deferred tax assetsdiffers to the findings from the levels model. Using the levels model, we foundsome evidence that the balance of unrecognized deferred tax assets is negativelyassociated with price. This result holds particularly for firms in the materialsand energy sectors where the effect is even more negative when the firm isloss-making. Overall, this evidence from the levels model suggests that thebalance of the unrecognized deferred tax assets signals losses in the future. Toconsider the possibility further, we examine the disclosure that is available aboutthe breakdown of the components making up the balance of the unrecognizeddeferred tax assets. This preliminary investigation reveals that materials andenergy companies are more likely to have carry-forward tax losses and foreignlosses in this balance than firms from other industries. This may account for theapparent signalling effect of the balance of unrecognized deferred tax assets ofmaterials and energy companies. We find no relation between current period accruals from recognized deferredtax assets (other than from losses), DTAT, and returns in any scenario. We dofind evidence that current period accruals due to losses, DTAL, are positively17 We are unable to run the returns regression for just tax consolidators and Materials &Energy sector companies in our study as the returns model has low explanatory powerand there are insufficient observations for these two subcategories of the sample to obtainmeaningful results.Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 27. C. Chang et al./Accounting and Finance 49 (2009) 645–673 671associated with returns for the full sample (p < 0.1), although the result doesnot persist when tax consolidators and materials and energy firms are removed.Overall, there is limited support for our expectation that changes in deferred taxassets are positively associated with returns because this result only holds fordeferred tax assets due to losses. The returns model result on DTAL is consistentwith our previous finding from the levels model. Taken together, we suggest theyprovide evidence that the market perceives deferred tax assets as representinglikely future tax savings. This is consistent with prior research by Amir andSougiannis (1999) and Zeng (2003). Additionally, it supports our contentionthat deferred tax assets due to losses and changes therein provide a reliable signalabout firms’ likely profitability because of AASB 1020’s stringent recognitionrequirement for these deferrals. The overall relevance of deferred tax assets to market value shown in both thelevels and returns models is not consistent with prior research on debt covenants.The studies by Whittred and Zimmer (1986) and Ramsay and Sidhu (1998) findthat while leverage ratios are usually calculated including deferred tax liabilities,deferred tax assets are excluded from the intangible assets in the calculation.Prima facie, it appears that the debt market views deferred tax assets differentlyto the equity market. However, recent research by Mather and Peirson (2006)suggests that the debt market’s perception of deferred tax assets may be changingslightly. They note that the definition of intangible assets in two-thirds of theAustralian debt contracts they review included reference to ‘in the opinion ofthe auditor’ in relation to the identification of intangible assets to be excludedfrom the computation of total assets. Therefore, it is possible that deferred taxassets may be included in the computation of leverage covenants subject to theinput of the auditor. If this occurs in practice, the apparent difference in perceptionsof the debt and equity markets in Australia is narrowing.5. Conclusion This study examines how the market perceives the relevance of deferred taxassets and liabilities reported by Australian companies under the income state-ment method, and whether current period tax accruals have information contentto reported earnings. Our analysis is conducted using both levels and returnsmodels. The levels model is loosely based on the Ohlson (1995) valuation frame-work. From prior research, we expect reported deferred tax liabilities to beviewed as financial liabilities, although the relation may be tempered by recurringitems that have little likelihood of reversal. Similarly, prior research suggests thatreported deferred tax assets represent future tax savings, although the recogni-tion of deferred tax assets due to losses may be interpreted as a signal of futurelosses. Prior research has not considered the market’s perception of unrecognizedassets due to tax losses carried forward. We do so in this study, and argue thatthe nature of the relation is undecided. On the one hand, the balances could bepositively perceived as representing future tax savings. On the other hand, theÓ The AuthorsJournal compilation Ó 2009 AFAANZ
  • 28. 672 C. Chang et al./Accounting and Finance 49 (2009) 645–673balance of unrecognized deferred tax assets may be negatively interpreted as asignal of future losses. For the returns model, prior research highlights the importance of consideringthe underlying components of tax accruals. However, disclosures under the incomestatement method only allow us to clearly identify the tax loss component ofrecognized deferred tax assets. We investigate two views on the informationconveyed by current tax deferrals. The first is espoused by standard-setters andsuggests that tax deferrals represent increases and decreases in balance sheetassets and liabilities which reflect future tax savings or payments (measurementperspective). The second suggests that the components of tax deferrals do notnecessarily reflect tax savings or tax costs; rather the deferrals convey informationabout items such as the sustainability of current period earnings or the accountingchoices made by firms (additional information view). Overall, our results from the levels and returns models provide evidence thatthe market perceives deferred tax assets as representing likely future tax savingsand deferred tax liabilities as representing future tax costs. Our results on themarket’s perception of unrecognized deferred tax assets are mixed. However,collectively it appears that the market views these amounts as a negative signalabout the future profitability of the firm. This signal is particularly strong wherefirms are more likely to make losses as is the case for the materials and energysectors. In conclusion, our results suggest that the income statement method providedmarket participants with information relevant to market value. Further researchis necessary to fully understand the consequences of discontinuing the incomestatement method in favour of the balance sheet method. In particular, AASB112 provides a setting for expanding the focus of this research and providing amore in-depth analysis of whether the results we document in this paper are dueto these accruals really being perceived as assets and liabilities, or whether theyreflect the underlying accounting which gives rise to the accruals in the firstinstance. Other differences that arise from AASB 112 such as a loosening of therecognition criteria for deferred tax assets also provide interesting avenues forfuture research. Finally, our descriptive statistics highlight a possibility thatchanges to the unrecognized deferred tax assets may be used for earningsmanagement given that, on average, firms in our sample showed a reversal ofthese unrecognized deferrals irrespective of whether the firm had made a profitor loss in the current year. This too provides an opportunity for future research.ReferencesAmir, E., M. Kirschenheiter, and K. Willard, 1997, The valuation of deferred taxes, Contemporary Accounting Research 14, 597–622.Amir, E., and T. Sougiannis, 1999, Analysts’ interpretation and investors’ valuation of tax carryforwards’, Contemporary Accounting Research 16, 1–33.Australian Accounting Standards Board, 1989, AASB 1020, Accounting for Income Taxes (AASB, Melbourne, Vic.).Ó The AuthorsJournal compilation Ó 2009 AFAANZ
  • 29. C. Chang et al./Accounting and Finance 49 (2009) 645–673 673Australian Accounting Standards Board, 1999, AASB 1020, Income Taxes (AASB, Melbourne, Vic.).Australian Accounting Standards Board, 2004, AASB 112, Income Taxes (AASB, Melbourne, Vic.).Ayres, B. C., 1998, Deferred tax accounting under SFAS, 109: An empirical investigation of its incremental value-relevance relative to APB, 11, Accounting Review 73, 195–212.Bartholomew, M., 1987, The case for partial allocation of company income tax, Chartered Accountant in Australia October, 53–56.Beaver, W. H., and R. E. Dukes, 1972, Interperiod tax allocation, earnings expectations and the behavior of security prices, Accounting Review 47, 320–332.Chaney, D. C., and P. K. Jeter, 1988, A financial statement analysis approach to deferred taxes, Accounting Horizons 2, 41–50.Chaney, P. K., and D. C. Jeter, 1989, Accounting for deferred income taxes: simplicity? Usefulness? Accounting Horizons 3, 6–13.Chaney, P. K., and D. C. Jeter, 1994, The effect of deferred taxes on security prices, Journal of Accounting, Auditing and Finance 9, 91–116.Defliese, P. L., 1991, Deferred taxes – more fatal flaws, Accounting Horizons March, 5(1), 89–91.De. Waegenaere, Sansing, R. C., and J. L. Wielhouwer, 2003, Valuation of a firm with tax loss carryover, Journal of the American Taxation Association, XX (Suppl.), 65–82.Givoly, D., and C. Hayn, 1992, The valuation of the deferred tax liability: evidence from the stock market, Accounting Review 67, 394–410.Hayn, C., 1995, The information content of losses, Journal of Accounting and Economics 20, 125–153.Herbohn, K. F., I. Tutticci, and K. Khor, 2008, Changes in unrecognised deferred tax accruals from carry-forward losses: opportunism or signalling?, paper presented at the AFAANZ Conference; 6–8 July 2008, Sydney, NSW.Kothari, S. P., and J. L. Zimmerman, 1995, Price and return models, Journal of Accounting and Economics 20, 155–192.Lasman, D., and R. Weil, 1978, Adjusting the debt-equity ratio, Financial Analysts Journal September–October, 34(5), 49–58.Mather, P., and G. Peirson, 2006, Financial covenants in the markets for public and private debt, Accounting and Finance 46, 285–307.Ohlson, J., 1995, Earnings, book values and dividends in security valuation, Contemporary Accounting Research 11, 661–687.Ramsay, I., and B. K. Sidhu, 1998, Accounting and non-accounting based information in the market for debt: evidence from Australian private debt contracts, Accounting and Finance 38, 197–221.Sidhu, B. K., 1996, The new deferred tax: a comment on AARF Discussion Paper, 22 ‘Accounting for income tax’, Australian Accounting Review 6, 37–49.Sidhu, B. K., and G. Whittred, 1993, The diffusion of tax effect accounting in Australian, Accounting and Business Research 23, 511–24.Sidhu, B. K., and G. Whittred, 2003, The role of political costs in the deferred tax policy choice, Australian Journal of Management 28, 63–82.Whittred, G., and I. Zimmer, 1986, Accounting information in the market for debt, Accounting and Finance 26, 19–33.Wise, T. D., 1986, A note on additional evidence on the behaviour of deferred tax credits, Journal of Business Finance and Accounting 13, 433–444.Zeng, T., 2003, The valuation of loss carryforwards, Canadian Journal of Administrative Sciences 20, 166–176.Ó The AuthorsJournal compilation Ó 2009 AFAANZ

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