Conservative accounting yields excessive risk-taking; a note

Johannes Becker and Melanie Steinhoff ()
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Melanie Steinhoff: University of Münster

No 1304, Working Papers from Oxford University Centre for Business Taxation

Abstract: We analyse the role of business taxation for corporate risk-taking under different accounting principles. We build a model in which investors have complete information and markets are perfect. A representative risk-neutral firm invests in one unit of an asset choosing from a continuum of assets differing in income and risk properties. The corporate tax base is determined following specific accounting principles (such as mark-to-market, lower-of-cost-or-market and historical cost). We demonstrate that conservative accounting may imply incentives to overinvest in risky assets. If tax loss offset opportunities are less than perfect, the mark-to-market principle penalizes risky investment whereas more conservative accounting leaves the risk choice unaffected.

Keywords: accounting; risk-taking; business taxation; corporate investment (search for similar items in EconPapers)
JEL-codes: G32 H25 M41 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-acc, nep-bec and nep-rmg
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