Taxation and Corporate Risk-Taking

Oxford University Centre for Business Taxation Working Paper Series; Munich Discussion Paper No. 2014-28

52 Pages Posted: 2 Jul 2014 Last revised: 30 Apr 2015

Dominika Langenmayr

Catholic University of Eichstaett-Ingolstadt; CESifo (Center for Economic Studies and Ifo Institute)

Rebecca Lester

Stanford Graduate School of Business

Date Written: April 30, 2015

Abstract

We study whether the corporate tax system provides incentives for risky firm investment. We first model the effects of corporate tax rates and tax loss offset rules on firm risk-taking. Testing the theoretical predictions, we find that firm risk-taking is positively related to the length of tax loss periods. This result occurs because the loss rules shift a portion of investment risk to the government, inducing firms to increase their overall level of risk-taking. Moreover, the corporate tax rate has a positive effect on risk-taking for firms that can expect to use their tax losses, and a negative effect for those that cannot. Thus, the effect of taxes on risky investment decisions varies among firms, and its sign hinges on firm-specific expectations of future tax loss recovery.

Keywords: Corporate taxation, firm risk-taking, net operating losses

JEL Classification: H25, H32, G32

Suggested Citation

Langenmayr, Dominika and Lester, Rebecca, Taxation and Corporate Risk-Taking (April 30, 2015). Oxford University Centre for Business Taxation Working Paper Series; Munich Discussion Paper No. 2014-28. Available at SSRN: https://ssrn.com/abstract=2460931 or http://dx.doi.org/10.2139/ssrn.2460931

Dominika Irma Langenmayr

Catholic University of Eichstaett-Ingolstadt ( email )

Auf der Schanz 49
Ingolstadt, D-85049
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Rebecca Lester (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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