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

Listed author(s):
  • Alexander Ljungqvist
  • Liandong Zhang
  • Luo Zuo

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 21834.

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Date of creation: Dec 2015
Publication status: 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.
Handle: RePEc:nbr:nberwo:21834
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