Do Investors Use Prior Tax Avoidance When Pricing Tax Loss Carryforwards?

Posted: 23 Apr 2016

See all articles by Sean T. McGuire

Sean T. McGuire

Texas A&M University - Department of Accounting

Stevanie S. Neuman

University of Missouri at Columbia - School of Accountancy

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Adam J. Olson

University of Cincinnati - Department of Accounting

Date Written: April 21, 2016

Abstract

The Internal Revenue Code allows firms to carry excess tax losses forward to offset future taxable income and reduce taxes. Consistent with tax loss carryforwards (TLCFs) creating a significant asset, prior research finds investors positively value TLCFs. However, investors face significant uncertainty about whether firms will have sufficient future taxable income to benefit from TLCFs. We hypothesize that investors’ valuation of new TLCFs will vary with firms’ prior tax avoidance behavior because it signals firms’ abilities to generate taxable income to offset TLCFs through tax planning. We confirm that investors assign a positive value to new TLCFs and find that investors’ valuation varies with firms’ prior tax avoidance behavior. Investors positively value TLCFs when firms exhibit high variability in prior tax avoidance and high levels of prior tax avoidance. Our results are incremental to the effect of changes in the valuation allowance on investors’ valuation of new TLCFs.

Keywords: tax loss carryforwards; prior tax avoidance behavior; firm valuation

JEL Classification: M40, M41, M49

Suggested Citation

McGuire, Sean T. and Neuman, Stevanie S. and Omer, Thomas C. and Olson, Adam J., Do Investors Use Prior Tax Avoidance When Pricing Tax Loss Carryforwards? (April 21, 2016). Journal of American Taxation Association, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2768375

Sean T. McGuire

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Stevanie S. Neuman (Contact Author)

University of Missouri at Columbia - School of Accountancy ( email )

College of Business
Columbia, MO 65211
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Adam J. Olson

University of Cincinnati - Department of Accounting ( email )

Cincinnati, OH 45221-0211
United States

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