The Pricing of Realized Tax Benefits from NOL Carryforwards: Effect of Income Statement Presentation

Abstract

ABSTRACT: We examine the pricing of realized tax benefits from net operating loss (NOL) carryforwards across income statement presentations. During the period 1987 through 1992, firms adopting SFAS No. 96 reported these tax benefits as part of income before extraordinary items (via a reduced provision for income tax expense), while non-adopting firms reported these benefits as extraordinary income items under APB No. 11. We provide evidence that NOL tax benefits were priced rationally when reported as extraordinary income items under APB No. 11; however, NOL tax benefits were overpriced, relative to their one-year-ahead persistence, when included in income before extraordinary items under SFAS No. 96. Our results suggest that the rational pricing of income tax information is affected by its presentation in the income statement, despite the clear reporting of sufficient additional details in the footnotes. Our findings provide support for the Financial Accounting Standards Board’s tentative decision to report income taxes in a separate section of the income statement.