DETERMINANTS OF THE VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS UNDERSFAS NO.-109

This paper explores the determinants of the valuation allowance for de ferred tax assets under SFAS No.109. We find that, consistent with SFA S No. 109, the allowance is larger for firms with relatively more defe rred tax assets and smaller for firms with higher levels of expected f uture taxable income. The most important explanatory variable for the valuation allowance is the level of firms' tax credit and tax loss car ryforwards, consistent with these items being more difficult to realiz e, We find little evidence that managers use the valuation allowance f or earnings management purposes, although these tests may not be very powerful.