Reducing Errors in Measures of Corporate Tax Incentives
26 Pages Posted: 30 Sep 2002
Date Written: June 27, 2002
Using a matched sample of firms' tax-loss carryovers computed from their U.S. tax returns and Compustat data over 1981-1995, we evaluate how well Compustat data (item #52) classifies firms as having U.S. tax-loss carryovers, identify sources of misclassification error, and investigate the effectiveness of data screens to reduce error rates. We find that using additional Compustat data for U.S. current income tax or total pretax income works well in reducing certain types of misclassification errors. We conclude that researchers should be particularly careful in constructing tax proxies when their research setting involves firms with foreign operations or corporate acquisitions activity.
Keywords: marginal tax rate, taxes, net operating losses, multinationals, corporate acquisitions
JEL Classification: H25, M41, G34
Suggested Citation: Suggested Citation