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Losses never sleep – The effect of tax loss offset on stock market returns during economic crises

Author

Listed:
  • Reinald Koch

    (KU Eichstaett-Ingolstadt
    KU Research Institute for Taxation)

  • Svea Holtmann

    (KU Eichstaett-Ingolstadt
    KU Research Institute for Taxation)

  • Henning Giese

    (Paderborn University
    KU Research Institute for Taxation)

Abstract

We analyze to what extent more generous tax loss offset regulations are associated with a weaker decline and stronger recovery of firm stock prices during economic crises. We argue that an unrestricted loss carryforward and, particularly, an unrestricted loss carryback provides firms with additional liquidity, which should lower the risk of bankruptcy and can be used for investment purposes. Our empirical findings document that (1) an unrestricted loss carryforward and an unrestricted loss carryback result in a weaker decline and more timely recovery of stock prices during the considered crises, (2) this effect is stronger in high-tax countries, and (3) this effect is also dependent upon pre-crisis profitability.

Suggested Citation

  • Reinald Koch & Svea Holtmann & Henning Giese, 2023. "Losses never sleep – The effect of tax loss offset on stock market returns during economic crises," Journal of Business Economics, Springer, vol. 93(1), pages 59-109, January.
    • Handle: RePEc:spr:jbecon:v:93:y:2023:i:1:d:10.1007_s11573-022-01134-4
    DOI: 10.1007/s11573-022-01134-4
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    More about this item

    Keywords

    Tax loss offset; Economic crisis; Firm performance;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • G01 - Financial Economics - - General - - - Financial Crises

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