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

TRR 266 Accounting for Transparency Working Paper Series No. 28 (2020)

WU International Taxation Research Paper Series No. 2018-09

76 Pages Posted: 14 Dec 2018 Last revised: 18 Jun 2020

See all articles by Benjamin Osswald

Benjamin Osswald

University of Illinois at Urbana-Champaign - Department of Accountancy

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business

Date Written: June 2020

Abstract

This study investigates whether country risk factors, including political and fiscal budget risk, attenuate the effectiveness of tax policy tools that aim to encourage corporate risk-taking. Exploiting a cross-country panel, we predict and find that the effectiveness of loss offset rules and tax rate changes is fully attenuated for firms located in high-risk countries. We document the attenuating effect of country risk is more pronounced in high-tax countries or when countries increase their corporate tax rate. Additional tests around the U.S. federal budget crises from 2011 to 2013 indicate that temporarily heightened fiscal budget risk attenuates the effectiveness of loss offset rules even in countries with low political risk. We identify conditions (low political and low fiscal budget risk) under which targeted tax policy tools effectively stimulate risk-taking. This suggests that ensuring taxpayers receive tax refunds is important in times of economic crises with budgetary or political challenges.

Keywords: corporate risk-taking, country risk, fiscal budget risk, investment incentives, loss offset, political risk

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? (June 2020). TRR 266 Accounting for Transparency Working Paper Series No. 28 (2020), 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 Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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
113
Abstract Views
1,692
rank
265,628
PlumX Metrics