Sharing risk with the government: How taxes affect corporate risk taking

Author

Alexander LJUNGQVIST, New York University
Liandong ZHANG, Singapore Management UniversityFollow
Luo ZUO, Cornell University

Publication Type

Journal Article

Version

Preprint

Publication Date

6-2017

Abstract

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.

Keywords

Risk taking, corporate taxes

Discipline

Accounting | Corporate Finance

Research Areas

Corporate Reporting and Disclosure

Publication

Journal of Accounting Research

Volume

55

Issue

3

First Page

669

Last Page

707

ISSN

0021-8456

Identifier

10.1111/1475-679X.12157

Publisher

Wiley: 24 months - No Online Open

Citation

LJUNGQVIST, Alexander; ZHANG, Liandong; and ZUO, Luo. Sharing risk with the government: How taxes affect corporate risk taking. (2017). Journal of Accounting Research. 55, (3), 669-707.
Available at: https://ink.library.smu.edu.sg/soa_research/1628

Copyright Owner and License

Authors

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Additional URL

https://doi.org/10.1111/1475-679X.12157