Transferring Risk Preferences from Taxes to Investments

Posted: 5 Apr 2010 Last revised: 14 Sep 2012

See all articles by Diana Falsetta

Diana Falsetta

University of Miami - Department of Accounting

Brad Tuttle

University of South Carolina - Department of Accounting

Date Written: March 1, 2010

Abstract

Prior studies demonstrate that tax considerations can influence a taxpayer’s investment decisions. By itself, this is not very surprising because the investment decisions in these studies resulted in either increasing or decreasing the tax refund or tax payment. The aim of the present study is to re-examine this relationship in order to isolate the possible psychological effects of year-end tax position. We do this by controlling the economic tax consequences of the investment decisions and by relying on theories of mental accounting for our predictions. Results of two experiments demonstrate that taxpayers are psychologically more likely to hold stocks when they owe a tax payment than when they receive a tax refund, despite the absence of economic tax consequences. Furthermore, this behavior generalizes to stocks with gains and to stocks with losses. The results are consistent with a mental accounting application of prospect theory in which risk preferences in one area (taxes) can potentially influence risk preferences in other areas (investments).

Keywords: Investments, Mental Accounting, Prospect Theory, Risk Preferences, Taxes

JEL Classification: H2, M4

Suggested Citation

Falsetta, Diana and Tuttle, Brad, Transferring Risk Preferences from Taxes to Investments (March 1, 2010). Contemporary Accounting Research, Summer 2011, Available at SSRN: https://ssrn.com/abstract=1583688

Diana Falsetta (Contact Author)

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States
305.284.8642 (Phone)
305.284.5737 (Fax)

Brad Tuttle

University of South Carolina - Department of Accounting ( email )

The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States
803-777-6639 (Phone)
803-777-6876 (Fax)

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