Net Operating Loss Carryforwards and Corporate Savings Policies

53 Pages Posted: 12 Jun 2018 Last revised: 14 Mar 2020

See all articles by Shane Heitzman

Shane Heitzman

University of Southern California - Marshall School of Business

Rebecca Lester

Stanford Graduate School of Business

Date Written: March 12, 2020

Abstract

We examine the relation between corporate cash holdings and tax net operating loss carryforwards (NOLs). Prior literature demonstrates that firms should distribute cash to shareholders, rather than retain the cash and generate passive investment income taxed at both corporate and investor levels. However, if the firm’s tax rate on passive income is lower than the shareholder’s – as in the case of an NOL firm – theory also shows that the firm should retain cash and invest on the shareholder’s behalf. Consistent with this, we find that tax losses are associated with higher levels of liquidity; firms save $0.12 to $0.17 per dollar of tax-effected benefit from available NOLs. Furthermore, investors place a higher value on corporate cash in tax loss firms because NOLs shield the returns from tax. The paper adds to the literature studying corporate financial policy responses to taxation and quantifies the role of NOLs in corporate savings decisions.

Keywords: Net Operating Losses, Taxes, Debt, Equity, Cash

JEL Classification: H25, H26, K34, G32, G38, M41

Suggested Citation

Heitzman, Shane and Lester, Rebecca, Net Operating Loss Carryforwards and Corporate Savings Policies (March 12, 2020). Stanford University Graduate School of Business Research Paper No. 18-29, Available at SSRN: https://ssrn.com/abstract=3185018 or http://dx.doi.org/10.2139/ssrn.3185018

Shane Heitzman (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Rebecca Lester

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

HOME PAGE: http://www.gsb.stanford.edu/faculty-research/faculty/rebecca-lester

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