Tax Rule Changes and the Timing of Asset Write-Offs in Loss Firms

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This paper examines the asset write-off behavior of loss firms in response to tax rule changes. In particular, we investigate two simultaneous changes in tax-loss carryforward offsetting in opposite directions in Germany and France. Understanding if and how tax losses affect firms’ financial reporting is important because investors could receive a biased signal of the firm value without such knowledge. We hypothesize and find that following changes in tax-loss carryforward offsetting rules, loss firms adjust their financial reporting write-offs to avoid costly large book-tax differences. In particular, German loss firms reduce their financial reporting write-offs in the post-period by 0.61% of total assets, whereas French loss firms increase their write-offs by 0.15% of total assets as a response to changes in tax-loss offsetting rules in opposite directions. We contribute to the literature by shedding light on the under-researched question of how changes in tax rules affect the financial reporting of loss firms.

Original languageEnglish
Pages (from-to)815-840
Number of pages26
JournalJournal of Business Finance and Accounting
Issue number5-6
Publication statusPublished - 1 May 2021

Bibliographical note

Funding Information:
We gratefully acknowledge comments and suggestions by Paul Andre (the editor), the anonymous referee, Kathleen Andries, Christof Beuselinck, Eva Eberhartinger, Scott Dyreng, Martin Jacob, Ur?ka Kosi, Ed Maydew, Erik Peek, and Kelly Wentland. We thank workshop participants at Vienna University of Economics and Business (Austria), Erasmus University Rotterdam (the Netherlands), I?SEG School of Management in Lille (France), WU-HU Workshop in Berlin (Germany), WU-HU Workshop in Vienna (Austria), the EAA 31st Doctoral Colloquium in St. Andrews (Scotland), the 2nd workshop ?Empirical Accounting and Finance? in T?bingen, (Germany), and conference participants at the 2015 EAA Annual Meeting in Glasgow (Scotland), for their helpful comments.

Publisher Copyright:
© 2020 The Authors. Journal of Business Finance & Accounting published by John Wiley & Sons Ltd

Research programs

  • RSM F&A


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