Tax Loss Carrybacks as Firm Fiscal Stimulus: A Tale of Two Recessions

ABSTRACT This paper studies effects of the five-year net operating loss carryback enacted near the ends of the 2001 and 2007–2009 U.S. recessions—a policy that gave firms larger U.S. federal tax refunds as a fiscal stimulus measure. Following the end of the 2001 recession, I find that the policy had little effect on firm financial conditions, and I find that firms allocated $0.40 of every refund dollar to investment in that period. In contrast, the policy improved firm financial conditions following the 2007–2009 recession, reducing bankruptcy risk and the probability of future credit-rating downgrades. In this period, I find that firms initially used the refunds to increase cash holdings before paying down debt in the following year. These results highlight the importance of considering macroeconomic conditions when studying firm uses of tax-related cash flow and the related effects on firm financial health. JEL Classifications: G31; H25; H32.