Using 113 staggered changes in corporate income tax rates across U.S. states, we provide evidence on how taxes affect corporate risk-taking decisions. Higher taxes reduce expected profits more for risky projects than for safe ones, as the government shares in a firm's upside but not in its downside. Consistent with this prediction, we find that risk taking is sensitive to taxes, albeit asymmetrically: the average firm reduces risk in response to a tax increase (primarily by changing its operating cycle and reducing R&D risk) but does not respond to a tax cut. We trace the asymmetry back to constraints on risk taking imposed by creditors. Finally, tax loss-offset rules moderate firms’ sensitivity to taxes by allowing firms to partly share downside risk with the government.
Risk taking, corporate taxes
Accounting | Corporate Finance
Corporate Reporting and Disclosure
Journal of Accounting Research
Wiley: 24 months - No Online Open
LJUNGQVIST, Alexander; ZHANG, Liandong; and ZHANG, Liandong.
Sharing risk with the government: How taxes affect corporate risk taking. (2017). Journal of Accounting Research. 55, (3), 669-707. Research Collection School Of Accountancy.
Available at: http://ink.library.smu.edu.sg/soa_research/1628
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