TY - JOUR

T1 - Net deferred tax assets and the long-run performance of initial public offerings

AU - Kovermann, Jost Hendrik

AU - Velte, Patrick

PY - 2019/8/8

Y1 - 2019/8/8

N2 - On average, firms’ going public severely underperform compared to the market, a phenomenon which is widely known in the literature as IPO underperformance. Though there is no generally accepted theory on the reasons, information asymmetries and the scarcity of information on the issuers is generally considered to contribute to the phenomenon. Accounting data provided by issuers in the offering prospectuses is mostly backward-looking information that is of limited use in forming expectations of future performance. This problem becomes even more pressing, given the increasing fraction of loss firms among IPOs.Net deferred tax assets (NDTA), however, are a balance sheet item that can be expected to include forward-looking information on future earnings. Reporting under IFRS, firms may recognize NDTA only to the extent, that positive income will be available in future periods. We, therefore, expect NDTA to be positively associated with the long-run performance of IPOs. Investigating a sample of firms going public in Germany between 2005 and 2015, we find that NDTA are positively associated with long-run stock price performance. The association is particularly strongamong loss firms.Our findings are relevant especially to investors, who regularly have difficulties valuing loss firms. We show that firms which recognized NDTA perform much better in the aftermarket than those that do not have NDTA on the balance sheet.The most important lesson to be learned is that IPO firms that did not recognize NDTA will likely be very poor investments

AB - On average, firms’ going public severely underperform compared to the market, a phenomenon which is widely known in the literature as IPO underperformance. Though there is no generally accepted theory on the reasons, information asymmetries and the scarcity of information on the issuers is generally considered to contribute to the phenomenon. Accounting data provided by issuers in the offering prospectuses is mostly backward-looking information that is of limited use in forming expectations of future performance. This problem becomes even more pressing, given the increasing fraction of loss firms among IPOs.Net deferred tax assets (NDTA), however, are a balance sheet item that can be expected to include forward-looking information on future earnings. Reporting under IFRS, firms may recognize NDTA only to the extent, that positive income will be available in future periods. We, therefore, expect NDTA to be positively associated with the long-run performance of IPOs. Investigating a sample of firms going public in Germany between 2005 and 2015, we find that NDTA are positively associated with long-run stock price performance. The association is particularly strongamong loss firms.Our findings are relevant especially to investors, who regularly have difficulties valuing loss firms. We show that firms which recognized NDTA perform much better in the aftermarket than those that do not have NDTA on the balance sheet.The most important lesson to be learned is that IPO firms that did not recognize NDTA will likely be very poor investments

KW - Management studies

KW - initial Public offering

KW - IPO

KW - Underperformance

KW - Deferred

KW - Taxes

KW - Deferred Tax Assets

UR - https://virtusinterpress.org/Net-deferred-tax-assets-and-the-long-run-performance-of-Initial-Public.html

UR - https://www.mendeley.com/catalogue/179882b7-ad0d-3956-b2f5-33fc25cc8a09/

U2 - 10.22495/cocv16i4art10

DO - 10.22495/cocv16i4art10

M3 - Journal articles

VL - 16

SP - 111

EP - 127

JO - Corporate Ownership and Control

JF - Corporate Ownership and Control

SN - 1727-9232

IS - 4

ER -