Losses never sleep - The effect of tax loss offset on stock market returns during economic crises
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View abstract on PubMed
Summary
This summary is machine-generated.Generous tax loss offset regulations, including loss carryforward and carryback, strengthen firm stock price resilience during economic crises. These rules provide crucial liquidity, reducing bankruptcy risk and aiding recovery.
Area Of Science
- Corporate Finance
- Financial Economics
- Taxation Policy
Background
- Economic crises pose significant risks to firm stock prices and financial stability.
- Tax regulations, specifically loss offset provisions, can influence corporate financial flexibility.
Purpose Of The Study
- To examine the association between generous tax loss offset regulations and firm stock price performance during economic crises.
- To investigate the role of unrestricted loss carryforward and loss carryback in mitigating stock price declines and enhancing recovery.
Main Methods
- Empirical analysis of firm stock price data during economic crises.
- Comparative study across countries with varying tax loss offset regulations.
Main Results
- Unrestricted loss carryforward and carryback are linked to weaker stock price declines and faster recoveries.
- The positive effect of these regulations is more pronounced in high-tax countries.
- The impact of tax loss offsets on stock price performance is contingent on a firm's pre-crisis profitability.
Conclusions
- More liberal tax loss offset rules enhance corporate financial resilience during economic downturns.
- Loss carryforward and carryback provisions act as crucial liquidity mechanisms, safeguarding firms against bankruptcy and supporting investment.
- Policy implications suggest that optimizing tax loss offset regulations can bolster market stability during crises.
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