Tax-Induced Earnings Management by Firms with Net Operating Losses

Abstract

This paper investigates tax-induced intertemporal income shifting by firms with net operating loss (NOL) carrybacks. For several years following the tax rate reductions of the Tax Reform Act of 1986 (TRA 86) these firms had incentives to shift recognition of revenues and expenses across years to increase their NOL carrybacks. By examining how NOL firms shift income and cross-sectional variation in the extent to which they do so, this research extends prior examinations of intertemporal income shifting by profitable firms (see Scholes, Wilson, and Wolfson [1992] and Guenther [1994]).1