Taxation and Corporate Risk-Taking
58 Pages Posted: 2 Jul 2014 Last revised: 26 Jul 2017
Date Written: June 1, 2017
We study whether the corporate tax system provides incentives for risky firm investment. We analytically and empirically show two main findings: first, risk-taking is positively related to the length of tax loss periods because the loss rules shift some risk to the government; and second, the tax rate has a positive effect on risk-taking for firms that expect to use losses, and a weak negative effect for those that cannot. Thus, the sign of the tax effect on risky investment hinges on firm-specific expectations of future loss recovery.
Keywords: Corporate taxation, firm risk-taking, net operating losses
JEL Classification: H25, H32, G32
Suggested Citation: Suggested Citation