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

Alexander Ljungqvist (), Liandong Zhang () and Luo Zuo

No 21834, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G32 H32 (search for similar items in EconPapers)
Date: 2015-12
New Economics Papers: this item is included in nep-acc and nep-pbe
Note: CF
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Citations: View citations in EconPapers (7)

Published as ALEXANDER LJUNGQVIST & LIANDONG ZHANG & LUO ZUO, 2017. "Sharing Risk with the Government: How Taxes Affect Corporate Risk Taking," Journal of Accounting Research, vol 55(3), pages 669-707.

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