A Study on Tax Loss Carryforwards and Firm Value
Asian Tax Journal Vol. 10 No. 2 (2009), pp. 199-223
Abstract
This study examines the relationship between tax loss carryforwards and firm value using data from non-financial listed companies in Korea from 2000 to 2005. Under current tax regulations, tax loss carryforwards can be deducted from future taxable income over a specified period, potentially reducing future tax liabilities. Consequently, these carryforwards may increase the present value of future cash flows and positively influence firm value. Conversely, the existence of tax loss carryforwards may signal poor past performance, which could negatively affect perceptions of future earnings and firm value. This study investigates how investors weigh these conflicting effects. The empirical results show, first, a significant positive relationship between tax loss carryforwards and firm value, suggesting that investors view these carryforwards more as a tax-saving benefit than as an indicator of future losses. Second, the study analyzes the impact of recognizing deferred tax assets related to these carryforwards. The results indicate that the interaction between tax loss carryforwards and the recognition of deferred tax assets is positively associated with firm value. This suggests that firms where management recognizes the future realizability of tax losses through deferred tax assets are perceived more favorably by the market compared to those that do not.
Keywords
- Tax loss carryforwards
- Firm value
- Deferred tax assets
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