Sharing Risk with the Government : How Taxes Affect Corporate Risk Taking

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Author(s)

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Detail(s)

Original languageEnglish
Pages (from-to)669-707
Journal / PublicationJournal of Accounting Research
Volume55
Issue number3
Publication statusPublished - 1 Jun 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.

Research Area(s)

  • corporate taxes, G32, H32, risk taking

Citation Format(s)

Sharing Risk with the Government: How Taxes Affect Corporate Risk Taking. / Ljungqvist, Alexander; Zhang, Liandong; Zuo, Luo.
In: Journal of Accounting Research, Vol. 55, No. 3, 01.06.2017, p. 669-707.

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review