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Taxation and corporate risk-taking

Author

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  • Dominika Langenmayr

    () (University of Munich)

  • Rebecca Lester

    () (Massachusetts Institute of Technology)

Abstract

In the recent period of low growth, many governments look for ways to encourage economic activity. Risky investment by firms is an important source of macroeconomic growth. This paper contributes to recent literature on firm risk-taking by exploring if the corporate tax system can provide incentives for firms to undertake risky investment. To do so, we first model that the effect of taxes on firm risk-taking depends on loss offset possibilities. We then confirm our predictions empirically using a large international firm-level dataset. We find that firm risk-taking is positively and significantly related to the length of the tax loss carryback and carryforward periods and that this relation increases with the level of the tax rate. For firms that cannot expect to offset losses, higher tax rates reduce risk-taking. If loss offset is probable, however, corporate tax rates have a significant and positive effect on risk-taking.

Suggested Citation

  • Dominika Langenmayr & Rebecca Lester, 2013. "Taxation and corporate risk-taking," Working Papers 1316, Oxford University Centre for Business Taxation.
  • Handle: RePEc:btx:wpaper:1316
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    Cited by:

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    3. Becker, Johannes & Johannesen, Niels & Riedel, Nadine, 2020. "Taxation and the allocation of risk inside the multinational firm," Journal of Public Economics, Elsevier, vol. 183(C).
    4. Valentyna Martynenko, 2019. "Assessment Of Favourableness For The Tax System Of Ukraine In The International Context," Baltic Journal of Economic Studies, Publishing house "Baltija Publishing", vol. 5(2).
    5. Alexander Ljungqvist & Liandong Zhang & Luo Zuo, 2017. "Sharing Risk with the Government: How Taxes Affect Corporate Risk Taking," Journal of Accounting Research, Wiley Blackwell, vol. 55(3), pages 669-707, June.
    6. Cooper, Maggie & Nguyen, Quyen T.K., 2019. "Understanding the interaction of motivation and opportunity for tax planning inside US multinationals: A qualitative study," Journal of World Business, Elsevier, vol. 54(6), pages 1-1.
    7. Mehrmann, Annika & Sureth-Sloane, Caren, 2017. "Tax loss offset restrictions and biased perception of risky investments," arqus Discussion Papers in Quantitative Tax Research 222, arqus - Arbeitskreis Quantitative Steuerlehre.
    8. Bornemann, Tobias, 2018. "Tax avoidance and accounting conservatism," arqus Discussion Papers in Quantitative Tax Research 232, arqus - Arbeitskreis Quantitative Steuerlehre.
    9. Askoldas Podviezko & Lyudmila Parfenova & Andrey Pugachev, 2019. "Tax Competitiveness of the New EU Member States," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 12(1), pages 1-19, February.
    10. Dinkel, Andreas, 2015. "Tax attractiveness and the allocation of risk within multinationals," arqus Discussion Papers in Quantitative Tax Research 189, arqus - Arbeitskreis Quantitative Steuerlehre.
    11. Hoppe, Thomas & Schanz, Deborah & Sturm, Susann & Sureth, Caren, 2019. "Measuring tax complexity across countries: A survey study on MNCs," arqus Discussion Papers in Quantitative Tax Research 245, arqus - Arbeitskreis Quantitative Steuerlehre.
    12. Osswald, Benjamin & Sureth, Caren, 2018. "Do country risk factors attenuate the effect of taxes on corporate risk-taking?," arqus Discussion Papers in Quantitative Tax Research 235, arqus - Arbeitskreis Quantitative Steuerlehre.
    13. Reinald Koch & Dominika Langenmayr, 2020. "Der steuerliche Umgang mit Verlusten: Reformoptionen für die Corona-Krise [The Tax Treatment of Losses: Options for Reforms During the Corona Crisis]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 100(5), pages 367-373, May.

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    More about this item

    Keywords

    Corporate taxation; firm risk-taking; net operating losses;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • 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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