Debt Issuance in the Face of Tax Loss Carryforwards

Anne M. Anderson, Nandkumar Nayar
2007 Social Science Research Network  
We examine the market impact of issuances of public and private debt by firms with sizable tax loss carryforwards. For this sample, public issuances are met with a significantly negative average stock price reaction. Conversely private debt placements are associated with a small but significantly positive average stock price reaction suggesting that such debt issuances may help in resolving asymmetric information related problems. However, after controlling for asymmetric information proxies,
more » ... ormation proxies, the stock price reaction to the debt issuance is more negative, the larger the tax loss carryforward. This evidence is consistent with the suboptimality of debt for financing when the firm has large tax loss carryforwards, and in turn, supports the relevance of taxes for debt usage. Additionally, the stock price reaction is less adverse, the larger the borrower's profit margin, and if the borrower does not increase its reliance on debt financing. ABSTRACT We examine the market impact of issuances of public and private debt by firms with sizable tax loss carryforwards. For this sample, public issuances are met with a significantly negative average stock price reaction. Conversely private debt placements are associated with a small but significantly positive average stock price reaction suggesting that such debt issuances may help in resolving asymmetric information related problems. However, after controlling for asymmetric information proxies, the stock price reaction to the debt issuance is more negative, the larger the tax loss carryforward. This evidence is consistent with the suboptimality of debt for financing when the firm has large tax loss carryforwards, and in turn, supports the relevance of taxes for debt usage. Additionally, the stock price reaction is less adverse, the larger the borrower's profit margin, and if the borrower does not increase its reliance on debt financing.
doi:10.2139/ssrn.1088751 fatcat:s2czrvq5xfcerdgvehs6eyi43u