We find that, consistent with SFAS No. 109, the allowance is larger for firms with relatively more deferred tax assets and smaller for firms with higher levels of expected future taxable income. The most important explanatory variable for the valuation allowance is the level of firms' tax credit and tax loss carryforwards, consistent with these items being more difficult to realize. We find little evidence that managers use the valuation allowance for earnings management purposes, although these tests may not be very powerful. This study investigates the role of alternative earnings components in the CEO cash compensation function. We find that cash compensation is significantly positively related to above the line earnings, as long as results are positive.
Compensation is shielded from the effects of above the line losses.
Similarly, nonrecurring transactions that increase income flow through to compensation, but nonrecurring losses do not. This effect is noted for gains and losses that arise both from extraordinary transactions, discontinued operations and nonrecurring items that do not qualify for below the line presentation. The classification of the gain or loss on the income statement is of relatively little importance. By contrast, several treatment-set markets exhibit cooperative behavior between auditors and clients to achieve jointly beneficial outcomes. This paper examines cross-sectional differences in the optimistic behavior of financial analysts.