The Effect of Limited Tax Loss Carryforwards on Corporate Investment

81 Pages Posted: 28 Jul 2022 Last revised: 13 Oct 2023

See all articles by Lisa Hillmann

Lisa Hillmann

WHU - Otto Beisheim School of Management

Martin Jacob

University of Navarra, IESE Business School

Date Written: October 12, 2023

Abstract

This paper examines the corporate investment effect of a time limit on the use of net operating losses (NOLs). We predict that, when countries limit the use of NOLs to a few years instead of allowing indefinite use, managers of loss-making firms have an incentive to increase investments to recover these losses quickly. Using exogenous shocks to profitability from two earthquakes in Italy and variation in the tax treatment of NOLs over time, we find support for this prediction: When the use of NOLs is restricted in time (unrestricted), firms facing losses (do not) increase investment. This effect can be explained by time-restricted NOLs incentivizing firms to increase investments now to utilize NOLs before they expire. Moreover, this effect is more significant for firms with shorter investment horizons and in more profitable industries. We provide external validity for this finding using a large panel of firms from European Union countries exploiting variation in tax regimes. These results indicate that restricting loss offsets can increase investments of loss-making firms.

Keywords: Corporate investment, tax loss carryforward, corporate taxation, tax policy

JEL Classification: G31, H25, H32

Suggested Citation

Hillmann, Lisa and Jacob, Martin, The Effect of Limited Tax Loss Carryforwards on Corporate Investment (October 12, 2023). TRR 266 Accounting for Transparency Working Paper Series No. 95, Available at SSRN: https://ssrn.com/abstract=4174990 or http://dx.doi.org/10.2139/ssrn.4174990

Lisa Hillmann (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Martin Jacob

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
184
Abstract Views
651
Rank
303,153
PlumX Metrics