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

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.