Net Operating Loss Carryforwards and Corporate Savings Policies

We examine the relation between tax net operating loss (NOL) carryforwards and corporate cash holdings. Corporate taxation of passive income increases the cost of holding liquid assets (“cash”), but NOLs can shield that income from tax. We test whether NOLs are associated with greater levels of cash. We develop a new proxy for worldwide NOL benefits from footnote disclosures that more precisely captures their worldwide value and demonstrate our proxy’s superiority over common alternatives. Our empirical evidence suggests that that NOLs lead to greater cash holdings, mitigate the impact of repatriation taxes on cash holdings, and increase investor valuation of cash. Our paper provides new evidence of how corporate financial policies respond to taxation, considers interactions with other tax explanations, and demonstrates the value of proper NOL measurement.