If managers do not expect sufficient future income to realize deferred tax assets, they must establish a valuation allowance for deferred tax assets (hereinafter "valuation allowance"). Prior studies have found that such valuation allowances provide value-relevant information in a timely manner, but are simultaneously used as a means of earnings management. However, for non-earnings-managing firms, value-relevant information associated with changes in valuation allowances is already exposed to the capital market before disclosure; therefore, investors would not react to the valuation allowance even when it is disclosed. Rather, consistent with prior research, investors' reaction to disclosed valuation allowances occurs because when the valuation allowance is changed as a means of earnings management, investors simply perceive such changes as new information and react accordingly. Using a sample of 210 observations for empirical analysis, we found that for non-earnings-managing firms, information about valuation allowance changes was substantially exposed to the market prior to disclosure, and no reaction was observed when the valuation allowance was disclosed. In contrast, for earnings-managing firms, investors were found to react mechanistically to valuation allowance changes used as a tool for earnings management. These empirical results imply that investors are unable to distinguish the earnings management component embedded in valuation allowances and use it in their investment decision-making. Therefore, including information based on managers' subjective judgment in financial statements requires great caution due to the limitations of investors' comprehensibility.