Net Operating Losses and Chapter 11

In this paper, we investigate the association between net operating losses (NOLs) and Chapter 11 filings by firms that decided to restructure their business (“restructuring firms”). Studying a sample of public firms in the US over a 30-year period, we show that after controlling for the expected industry post-reorganization tax rates, higher NOLs are associated with the decision to file under Chapter 11. Further investigation shows that fresh-start firms benefit from lower tax rates after emerging from the Chapter 11 procedure. We contribute to the tax literature on NOLs and important firm decisions and on taxation in fresh-start firms, as well as to the literature on Chapter 11. We inform policymakers and practitioners regarding the use of tax benefits in restructuring frameworks.