Tax Loss Carryforward Disclosure and Uncertainty

• In Event: Concurrent Session 3.4: Disclosure and Consequences

Abstract

The value of tax loss carryforwards is difficult to assess for an investor since it strongly depends on if and when they can be offset against taxable income. We examine whether companies voluntarily disclose additional information about tax loss carryforwards when their recoverability is more uncertain. To investigate whether companies consider such uncertainty in their disclosure policy, we employ a pooled cross-section regression analysis, controlling for other factors that might influence disclosure. We develop a disclosure index and distinguish between mandatory disclosure under IAS 12 and voluntary disclosure. Our empirical analysis is based on a sample of German hand collected data from notes of IFRS financial statements. We find that companies that are exhibited to greater ex ante uncertainty voluntarily disclose more and more useful information regarding the future usability of tax loss carryforwards. These findings are robust for several indicators representing information and income uncertainty. Our findings suggest that managers anticipate the investors’ need for more private information and thus disclose them voluntarily to send a signal of credibility to the market participants. It can be assumed that disclosing this information is less costly than facing potential risk premiums demanded by investors leading to higher cost of capital.

Authors

• Jens Mueller, University of Graz

• Vanessa Flagmeier, University of Graz