The market pricing of net operating loss carryforwards: implications of the tax motivations of mergers

An empirical analysis of the market pricing of net operating loss carryforwards (NOLs) and the ability for tax considerations to contribute to mergers and the substantial merger premiums often observed by target firms is presented. The restrictive anti‐merger tax‐transfer provisions of Section 382 of the Tax Reform Act of 1976 (TRA) serve as the legislative vehicle through which performance differentials of NOL and non‐NOL firms are measured. The results of the study are consistent with the hypothesis that NOLs are at least partially priced in the absence of a merger, a fact that suggests that tax‐motivated mergers may be more myth than reality. Since the anti‐merger tax‐transfer penalties contained within the Tax Reform Act of 1986 merely represent incremental increases over those of the TRA, the results of the study remain relevant in the current legislative environment.