The effect of tighter tax loss offsetting rules on firms' innovation: evidence from South Korea

Jae Yeon Sim, Natalie Kyung Won Kim and Jeong-Taek Kim

International Journal of Emerging Markets, 2023, vol. 20, issue 6, 2611-2635

Abstract: Purpose - This study investigates how the introduction of a stricter loss carryforward offset rule affects firms' innovation. Design/methodology/approach - This study investigates the overall impact of a Korean tax reform that introduced a tighter loss deduction through a difference-in-differences approach and regression discontinuity design. Findings - This study finds that firms subject to the more restrictive tax loss offset provisions tend to file fewer patents than firms not subject to the provision. The authors further find that this effect is more pronounced for firms with high R&D intensity, more investment opportunities and weaker monitoring mechanisms. Research limitations/implications - The results of this study suggest that more restrictive loss carryforward provisions may deter firms from innovation. This study contributes to the literature on the impact of tax loss rules, the effect of tax policies on investments and the real effects of corporate taxation. Practical implications - This study sheds light on the debate of the consequences of a Korean tax reform. Specifically, the authors examine whether a stricter tax loss offset policy indeed dampens corporate innovation. Originality/value - This study exploits a unique and infrequent exogenous tax policy change. The South Korean tax reform creates a treatment group of large firms that were affected by the tax reform, and a control group of small and medium-sized firms that were unaffected. This study takes advantage of this setting to examine the research question.

Keywords: Tax reform; Tax loss offset; Tax loss carryforward; Loss deduction; Patents; Innovation; Real effects of taxation (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoemp:ijoem-02-2023-0239

DOI: 10.1108/IJOEM-02-2023-0239

Access Statistics for this article

International Journal of Emerging Markets is currently edited by Prof Ilan Alon

More articles in International Journal of Emerging Markets from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().