The Value of a Loss: The Impact of Restricting Tax Loss Transfers

Abstract

We study the economic consequences of anti-loss trafficking rules, which disallow the
use of loss carry-forwards as tax shield after a substantial ownership change. We use
staggered changes to anti-loss trafficking rules in the EU27 Member States, Norway
and United Kingdom from 1998 to 2019 and find that limiting the transfer of tax losses
reduces the number of M&As by 18%. The impairment is driven by loss-making targets.
Turning to the broader impact on industry dynamics, we find decreases in survival rates
of young companies in response to tighter regulations. Some of these start-up deaths
are compensated by new firm entrants. We further detect that loosening of regulation
spurs firm entry and survival. Finally, tightening (loosening) anti-loss trafficking rules
impairs (increases) return on assets, especially for R&D-intensive firms that are more
prone to loss-making in their life cycle.

Keywords: Mergers and acquisitions, anti-loss trafficking rules, taxes, market entry, market exit, productivity, innovation

JEL Classification: G34, G38, H25