Value relevance of deferred tax assets in the Brazilian banking industry^*

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.

Keywords:
value relevance; banks; market value; deferred tax assets (DTAs)