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Conservative accounting yields excessive risk-taking; a note

Author

Listed:
  • Johannes Becker

    (University of Münster)

  • Melanie Steinhoff

    (University of Münster)

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.

Suggested Citation

  • Johannes Becker & Melanie Steinhoff, 2013. "Conservative accounting yields excessive risk-taking; a note," Working Papers 1304, Oxford University Centre for Business Taxation.
    • Handle: RePEc:btx:wpaper:1304
    as

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    File URL: http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/WP1304.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    accounting; risk-taking; business taxation; corporate investment;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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