Tax Loss Carryforwards, Political Connections and Firm Investment Efficiency: Evidence from Malaysia

Abstract

This study examines how tax loss carryforwards (TLCFs) affect firm investment efficiency and whether political connections moderate this relationship. Using firm level data from Malaysia and ordinary least squares estimation, the results show that longer TLCF shelter periods are associated with higher investment efficiency. However, this positive effect is significantly attenuated among politically connected firms (PCFs). Further analysis reveals that TLCFs mitigate underinvestment but do not significantly affect overinvestment, regardless of political connections. This study contributes to the literature by providing novel evidence on the real effects of tax-based incentives in an emerging market setting. It further highlights how political connections distort the effectiveness of such incentives and underscores the interaction between tax policy and political economy in shaping corporate investment outcomes.