Tax Loss Carryovers in a Competitive Environment*

Anja De Waegenaere, Richard Sansing*, Jacco L. Wielhouwer

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review


The fact that incumbent firms can immediately deduct research and development (R&D) investments from taxable income is generally believed to give them a strategic advantage over new firms that cannot deduct the investment cost, but instead generate a net operating tax loss carryover. Using an analytical model, we show that this conventional wisdom need not hold in a competitive environment. We examine operating and investment decisions in a duopolistic industry in which an initial investment in R&D yields an immediate tax benefit for one firm, but creates a net operating loss carryover for the other firm. If both firms invest in R&D, the firm with the net operating loss carryover makes more aggressive capital investment decisions following successful R&D. This may deter the incumbent firm from investing in R&D despite the lower aftertax costs of this investment. Changing the tax loss carryover rules would thus not only affects start-up or loss firms, but would also affect the investment decisions of profitable firms in the same industry.

Original languageEnglish
Pages (from-to)180-207
Number of pages28
JournalContemporary Accounting Research
Issue number1
Publication statusPublished - Mar 2021


  • net operating loss carryovers
  • R&amp
  • D investments
  • capital expenditures


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