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Taxation and corporate risk-taking

  • Dominika Langenmayr

    ()

    (University of Munich)

  • Rebecca Lester

    ()

    (Massachusetts Institute of Technology)

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.

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File URL: http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Working_Papers/Series_13/WP1316.pdf
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Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 1316.

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Date of creation: 2013
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Handle: RePEc:btx:wpaper:1316
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