Does the Disclosure of a Valuation Allowance Reinforce Misguided Incentives of a Progressive Capitalization of Deferred Taxes from Loss Carryforwards?

This paper analyzes the incentive problems of the disclosure of a so-called valuation allowance of deferred taxes. Since the disclosure of a relatively high valuation allowance indicates a negative profit development, misguided incentives of a progressive capitalization of deferred taxes from loss carryforwards would have to occur in order to avoid a negative signal. As a result, this would especially increase the loss potential in times of crisis, which would probably lead to a failure of the company.