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The paper presents a finite element study of the dynamic necking formation and energy absorption in AISI 304 steel sheets. The analysis emphasizes the effects of strain induced martensitic transformation (SIMT) and plastic strain development on flow localization and sample ductility. The material behavior is described by a constitutive model proposed by the authors which includes the SIMT at high strain rates. The process of martensitic transformation is alternatively switched on and off in the simulations in order to highlight its effect on the necking inception. Two different initial conditions have been applied: specimen at rest which is representative of a regular dynamic tensile test, and specimen with a prescribed initial velocity field in the gauge which minimizes longitudinal plastic wave propagation in the tensile specimen. Plastic waves are found to be responsible for a shift in the neck location, may also mask the actual constitutive performance of the material, hiding the expected increase in ductility and energy absorption linked to the improved strain hardening effect of martensitic transformation. On the contrary, initializing the velocity field leads to a symmetric necking pattern of the kind described in theoretical works, which reveals the actual material behavior. Finally the analysis shows that in absence of plastic waves, and under high loading rates, the SIMT may not further increase the material ductility.