The Economics of Managerial Taxes and Corporate Risk-Taking

78 Pages Posted: 24 Oct 2017 Last revised: 10 Sep 2018

Chris Armstrong

University of Pennsylvania - Accounting Department

Stephen Glaeser

University of North Carolina (UNC) at Chapel Hill - Accounting Area

Sterling Huang

Singapore Management University - School of Accountancy

Daniel J. Taylor

University of Pennsylvania - The Wharton School

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 and Glaeser, Stephen and Huang, Sterling and Taylor, Daniel J., The Economics of Managerial Taxes and Corporate Risk-Taking (July 10, 2017). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3057464 or http://dx.doi.org/10.2139/ssrn.3057464

Chris S. Armstrong

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Stephen Glaeser

University of North Carolina (UNC) at Chapel Hill - Accounting Area ( email )

McColl Building
Chapel Hill, NC 27599
United States

Sterling Huang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore
6808 7929 (Phone)

Daniel Taylor (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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