The Economics of Managerial Taxes and Corporate Risk-Taking

68 Pages Posted: 24 Oct 2017 Last revised: 12 Jan 2019

See all articles by Chris Armstrong

Chris Armstrong

Stanford Graduate School of Business

Stephen Glaeser

University of North Carolina (UNC) at Chapel Hill

Sterling Huang

New York University (NYU) - New York University (NYU), Shanghai

Daniel J. Taylor

The Wharton School, University of Pennsylvania

Date Written: July 10, 2017

Abstract

We examine the relation between managers’ personal income tax rates and their corporate investment decisions. Using plausibly exogenous variation in federal and state tax rates, we find a positive relation between managers’ personal tax rates and their corporate risk-taking. Moreover — and consistent with our theoretical predictions — we find that this relation is stronger among firms with investment opportunities that have a relatively high rate of return per unit of risk, and stronger among CEOs who have a relatively low marginal disutility of risk. Importantly, our results are unique to senior managers’ tax rates — we do not find similar relations for middle-income tax rates. We also find that the tax-induced risk-taking relates to idiosyncratic rather than systematic risk, suggesting that it will not be priced by well-diversified shareholders. Collectively, our findings provide evidence that managers’ personal income taxes influence their corporate risk-taking.

Keywords: Corporate risk-taking; risky investment; risk-taking incentives; personal income taxes; federal income taxes; state income taxes; agency conflict

JEL Classification: G32, H24, J33, M52

Suggested Citation

Armstrong, Chris S. and Glaeser, Stephen and Huang, Sterling and Taylor, Daniel, The Economics of Managerial Taxes and Corporate Risk-Taking (July 10, 2017). The Accounting Review, Forthcoming, Singapore Management University School of Accountancy Research Paper Series Vol. 6, No. 3 Paper No 2018-87, Available at SSRN: https://ssrn.com/abstract=3057464 or http://dx.doi.org/10.2139/ssrn.3057464

Chris S. Armstrong

Stanford Graduate School of Business ( email )

655 Knight Way
E316
Stanford, CA 94305-5015
United States

HOME PAGE: http://https://www.gsb.stanford.edu/faculty-research/faculty/christopher-s-armstrong

Stephen Glaeser

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Sterling Huang

New York University (NYU) - New York University (NYU), Shanghai ( email )

1555 Century Ave
Shanghai, Shanghai 200122
China

Daniel Taylor (Contact Author)

The Wharton School, University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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