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Abstract

This paper explores the role of net operating loss carryforwards (NOLCFs) in the decision- making and valuation of large firms. NOLCFs allow firms to carry losses or negative profits into the future and deduct them from taxable income in a future period. To understand how this tax deduction affects key variables, such as investment, equity distributions, and corporate income tax revenue, I estimate a dynamic firm investment model using simulated method of moments. After determining the deep parameters of the model, I vary policy parameters and evaluate the effects of policy changes on the key moments. For a firm with average assets, the results show that the average NOLCF stock before the 2017 U.S. federal tax reform improved corporate valuation by approximately 5-6%. Further, the 40% decline in the corporate tax rate in 2017 reduced the impact of NOLCFs on corporate valuation roughly proportionally.