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Tax loss carryforwards and corporate behavior

Author

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  • Masanori Orihara

    (Policy Research Institute, Ministry of Finance,Japan)

Abstract

Tax losses are prevalent in the corporate sector of many countries. Firms with tax losses can deduct these losses from current or future taxable income. This deduction reduces corporate marginal tax rates and in turn can affect managerial incentives. Using industry-year level tax return data and accounting data, we show that tax loss carryforwards decrease leverage. We also show that tax loss carryforwards increase investments when the effective tax rates among the industry-year observations are considerably affected by tax loss carryforwards. Our findings suggest that the incentive effects of tax loss carryforwards on corporate behavior need to be considered in tax reforms in addition to other factors in public finance.

Suggested Citation

  • Masanori Orihara, 2015. "Tax loss carryforwards and corporate behavior," Discussion papers ron271, Policy Research Institute, Ministry of Finance Japan.
  • Handle: RePEc:mof:wpaper:ron271
    as

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    File URL: https://warp.da.ndl.go.jp/info:ndljp/pid/11511171/www.mof.go.jp/pri/research/discussion_paper/ron271.pdf
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    References listed on IDEAS

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    Cited by:

    1. Hervé Roche, 2022. "The implications of tax loss carryforwards on investment policy," Mathematics and Financial Economics, Springer, volume 16, number 6, March.
    2. 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.

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    More about this item

    Keywords

    tax loss carryforward; leverage; investment;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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