Estimating and imputing missing tax loss carryforward data to reduce measurement error

European Accounting Review (forthcoming)

48 Pages Posted: 4 Oct 2018 Last revised: 29 Apr 2021

See all articles by Malte Max

Malte Max

VU University Amsterdam - Department of Accounting

J. Wielhouwer

VU University Amsterdam

Eelke Wiersma

VU University Amsterdam - Department of Accounting

Date Written: April 29, 2021

Abstract

The ability to reduce current and future taxable income with prior years’ taxable losses is highly relevant for explaining firms’ effective tax rates. Compustat data on the tax loss carryforward (TLCF) are, however, often missing. We propose a method to estimate values for the missing TLCF data instead of the common practice in the literature of imputing zero values. In order to assess the accuracy of our method, we compare our estimated TLCFs with (i) a random selection of 10-K data and (ii) Compustat data for firm-years where Compustat data is available. The results show that our estimated values align very closely with the reported data. Re-analyzing Frank et al. (2009) shows that imputing our estimated values instead of zeros leads to a large decrease in measurement error. This reduces the risk that firms with missing data and low effective tax rates are incorrectly classified as tax aggressive. Consistent with this, a re-analysis of Dyreng et al. (2017) shows that using our estimated TLCFs leads to economically and statistically different conclusions compared to imputing zeros. Using our estimated values thus increases the probability of correct inferences in studies that use Compustat TLCF data. The estimated values are available from https://doi.org/10.34894/N9J1WE.

Keywords: tax loss carryforward, measurement error, tax aggressiveness, imputation

JEL Classification: C52, H25, H26, H32, M41

Suggested Citation

Max, Malte and Wielhouwer, Jacco L. and Wiersma, Eelke, Estimating and imputing missing tax loss carryforward data to reduce measurement error (April 29, 2021). European Accounting Review (forthcoming), Available at SSRN: https://ssrn.com/abstract=3204416 or http://dx.doi.org/10.2139/ssrn.3204416

Malte Max

VU University Amsterdam - Department of Accounting ( email )

Netherlands

Jacco L. Wielhouwer

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Eelke Wiersma (Contact Author)

VU University Amsterdam - Department of Accounting ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

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