Valuation and Pricing of Tax Loss Carryforwards Academic Article uri icon


  • The Internal Revenue Code allows firms to carry excess tax losses forward to offset future taxable income and reduce future tax payments. Consistent with tax loss carryforwards (TLCFs) creating a significant asset, prior research finds that investors positively value TLCFs (Amir and Sougiannis 1999). However, investors face significant uncertainty about whether firms will have future taxable income sufficient to derive a benefit from the TLCF. We hypothesize that investors’ valuation of TLCFs will vary with firms’ prior tax avoidance behavior because it signals firms’ abilities to generate future taxable income through tax planning. Consistent with prior research, we find that, in general, investors assign a positive value to TLCFs; however, their valuation differs depending on firms’ prior tax avoidance behavior. Investors positively value TLCFs only when the firm exhibits either high levels of tax avoidance in prior periods or high variability in their level of tax avoidance in prior periods.

author list (cited authors)

  • McGuire, S. T., Neuman, S. S., Olson, A. J., & Omer, T. C.

publication date

  • August 2014