The Information Content of Forgoing Tax Refunds: Evidence from Private Debt Contracts

54 Pages Posted: 4 Mar 2016 Last revised: 23 Mar 2019

See all articles by Daniel Saavedra

Daniel Saavedra

UCLA Anderson School of Management

John S. Hughes

University of California at Los Angeles

Date Written: March 19, 2019

Abstract

In this study, we consider whether forgoing a tax refund in favor of carrying losses forward conveys information relevant to prospective lenders. We model the tax refund decision and provide evidence that lenders rationally infer that firms with higher expected future profits are more likely to carry forward losses, rather than carry losses back for an immediate tax refund. Firms that forgo tax refunds report higher future profits and receive lower borrowing costs than do firms that claim refunds after controlling for other factors that may influence tax refund decisions. These results are stronger in cases where there is greater information asymmetry between lenders and borrowers. More generally, our findings contribute to the literature on real corporate decisions as devices that credibly reduce information asymmetry about firms’ future prospects.

Keywords: Tax Refunds, Debt Contracting, Communication, Revelation, Tax Policy, Tax Loss Carryback

JEL Classification: G21, G28, G32, H25, H32

Suggested Citation

Saavedra, Daniel and Hughes, John S., The Information Content of Forgoing Tax Refunds: Evidence from Private Debt Contracts (March 19, 2019). Available at SSRN: https://ssrn.com/abstract=2741181 or http://dx.doi.org/10.2139/ssrn.2741181

Daniel Saavedra (Contact Author)

UCLA Anderson School of Management ( email )

Los Angeles, CA
United States

John S. Hughes

University of California at Los Angeles ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-794-9553 (Phone)
310-267-2193 (Fax)

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