Tax Loss Carryforwards and Firm Investments

ABSTRACT The asymmetric tax treatment of gains versus losses can lead to the creation of a tax loss carryforward (TLCF) in case of prior-period losses. TLCFs shield future income from taxation and can therefore be relevant for investment decisions. The relevance of this tax shield is underlined by the substantial amounts of TLCFs carried forward by U.S. corporations. Despite the theoretically expected positive relation, empirical research on TLCFs and firm-level investments is scarce. We first investigate the TLCF investment relation using simulation analyses and differentiate capital expenditure from R H32; M41.