Tax rule changes and the timing of asset write-offs in loss firms

Abstract

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.