Aggregate Deferred Tax Asset Valuation Allowance and GDP Growth

This paper examines whether deferred tax asset valuation allowance growth, as a measure of expected future performance, aggregated at the macroeconomy level, conveys information about future GDP growth. Using hand-collected tax footnote data from publicly traded firms over the 1993 to 2019 period, I find that quarterly aggregate valuation allowance growth is negatively associated with future GDP growth up to four quarters ahead. This relationship is incremental to existing accounting and macroeconomic GDP growth indicators, especially for forecast horizons longer than one quarter when other indicators are uninformative. Additionally, the findings suggest that aggregate valuation allowance growth provides unique information that cannot be obtained from other sources of management information, such as management forecasts, the allowance for doubtful accounts, banks’ loan loss provision, and goodwill impairment loss. The findings further indicate that the documented association of GDP growth and aggregate valuation allowance growth is driven by the corporate profit growth component of GDP growth. Collectively, the evidence indicates that aggregate valuation allowance growth provides incremental forward-looking information about GDP growth.