Abstract
ABSTRACT This study aimed to investigate the informational relevance to the capital market of the significant level of deferred tax assets (DTAs) in the Brazilian banking industry, identifying whether such assets influence the market value of publicly-held banks. The value relevance of DTAs in the banking industry is an incipient topic in the national literature, with conflicting results in the international research. Brazil presents characteristics, most notably regarding the dimension of the asymmetries between accounting and taxable profit, which justify concern about the effects of DTAs on the market value of banks. The literature highlights issues involving DTAs related to their ability to generate economic benefits and control of the entity, especially in the banking industry, due to not fulfilling the role of financial intermediation, which would make them devoid of economic substance. This would signal potential bank risks and weaknesses, such as a reduction in the quality of equity and profits, in addition to distortions in the economic-financial indicators, which would justify a negative perception on the part of investors. As the study’s main contribution to the literature, we can highlight the identification that in the Brazilian market, the asymmetries between banks’ taxable and corporate earnings, the origin of deferred tax assets, weigh negatively on the market value of these institutions. We empirically tested the hypothesis in the Brazilian capital market, using data from 2000 to 2017 on publicly-held banks, by estimating two models - Market-to-Book and Ohlson (1995). The results of this study show that in the Brazilian capital market there is a negative relationship between the volume of the banks’ DTAs and the market value of these entities, corroborating the hypothesis that investors identify the relevance of these assets in the equity structure as a sign of the quality of the equity and the profit of these entities being undermined.
Highlights
This study investigates the informational relevance for the capital market of the expressive level of deferred tax assets (DTAs) in the Brazilian banking industry, the controversies involving these balance sheet items, and the potential implications for the banking entities
Y The assumptions that support the deferment of earnings expenses are subjective and questionable, such as the presumption of future earnings (Carey, 1944; Graul & Lemke, 1976). Considering these arguments, added to the high representativeness of these assets in the equity structure of Brazilian banks, it is possible to infer that investors evaluate the stock of DTAs as an element that compromises the quality of the capital and earnings of banking institutions, exercising a negative influence over the formation of the market value of these entities, which supports the following research hypothesis to be empirically tested: H1: in the Brazilian capital market, there is a negative association between the magnitude of DTAs in the equity structure of banks and the market value of these entities
Considering that the informational relevance for the capital market of deferred taxes has been evaluated from various perspectives in the studies conducted by Ayers (1998), Amir et al (2001), Chang et al (2009), and Badenhorst and Ferreira (2016), but that these did not cover the banking industry, this study sought to investigate the informational relevance of DTAs in the Brazilian banking industry, evaluating whether relevance helps explain the market value of the book value of the banks
Summary
This study investigates the informational relevance for the capital market of the expressive level of deferred tax assets (DTAs) in the Brazilian banking industry, the controversies involving these balance sheet items, and the potential implications for the banking entities. They depend on future taxable income to generate economic benefit, a situation that is aggravated by the absence of an adjustment to present value – DTAs measured by their nominal values do not represent future net economic benefits discounted by a risk rate, which in an evaluation of the entity’s value increases the volatility of the pricing of its assets and, increases investors’ perceptions of risk, especially in future cash flows over a long term horizon (up to 10 years) – and due to assetization based on highly subjective assumptions (Moody’s Corporation, 2015; Standard & Poor’s Ratings Services, 2016) Consequences of this phenomenon can indicate the weakening of NE (in the absence of future taxable income DTAs will be recorded as losses), a decrease in earnings quality, a reduction in regulatory capital, as well as causing distortions in banks’ economic-financial indicators, those related to the quality of the institutions’ capital (Badenhorst & Ferreira, 2016; BCBS, 2011; Graul & Lemke, 1976; Skinner, 2008). The results reveal that, in the Brazilian capital market, there is a negative association between the magnitude of DTAs and the market value of banks, contributing to the still scarcely explored literature with regard to the implications of deferred taxes in banks and in the Brazilian capital market
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