Valuation of tax loss carryforwards

Tax loss carryforwards (TLC) are a valuable asset because they can potentially reduce a company’s future tax payments. However, there is often a great deal of uncertainty regarding the probability and timing of these tax savings. We propose a contingent-claim model to value this asset. The value is determined primarily by the size of accumulated carryforwards relative to earnings. We show that, for poorly performing firms with large TLC, (1) …