Do Country Risk Factors Attenuate the Effect of Taxes on Corporate Risk-Taking?

67 Pages Posted: 14 Dec 2018

See all articles by Benjamin Osswald

Benjamin Osswald

University of Wisconsin - Madison; Vienna University of Economics and Business

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business

Date Written: December 5, 2018

Abstract

This study examines whether country-specific risk attenuates the association between tax policies and corporate risk-taking. We define country-specific risk (political and fiscal budget risk) as taxpayer’s risk that tax refunds on losses cannot be paid due to the institutional environment or fiscal reasons. We exploit a cross-country panel with 234 changes in corporate tax rates and 49 changes in loss offset rules. We investigate whether government risk-sharing via loss offset rules and tax rates affects risk-taking conditional on country risk. We also examine whether tax rate changes, that scale the risk-sharing effect, influence the propensity to conduct risky projects in different country-level risk environments. Our results suggest that country-level risk fully attenuates the previously documented association between tax policies and corporate risk-taking. It attenuates both the effectiveness of loss offset rules and tax rate changes on corporate risk-taking. While changes in tax policy are attractive to policymakers because alternative instruments to encourage risk-taking cannot as easily be adjusted, we provide significant evidence that country risk considerably limits policymakers’ ability to induce firm risk-taking via changes in tax policies.

Keywords: Corporate risk-taking, country risk, cross-country study, fiscal risk, risky investments

JEL Classification: H25, H32, G32

Suggested Citation

Osswald, Benjamin and Sureth-Sloane, Caren, Do Country Risk Factors Attenuate the Effect of Taxes on Corporate Risk-Taking? (December 5, 2018). WU International Taxation Research Paper Series No. 2018-09. Available at SSRN: https://ssrn.com/abstract=3297418 or http://dx.doi.org/10.2139/ssrn.3297418

Benjamin Osswald (Contact Author)

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Caren Sureth-Sloane

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
89
Abstract Views
1,341
rank
299,767
PlumX Metrics