The Effect of Tax Policies on Corporate Risk-Taking: Evidence From Bonus Depreciation

Abstract

This study investigates the impact of accelerated tax depreciation on corporate risk-taking decisions in the United States. Bonus depreciation — a tax policy introduced in 2001 that induced industry-specific variation in accelerated depreciation schedules — should increase the after-tax net gain from firms’ investment risk. Using a generalized Difference-in-Differences framework, I find that the average U.S. public firm increases earnings volatility by 17.93% in response to bonus depreciation. I exploit heterogeneity in firms’ financial constraints and production efficiency to shed light on the economic mechanisms through which bonus depreciation shapes firms’ risk preferences. I find that small firms, financially constrained firms, and unproductive firms respond more strongly to the policy. The results imply that phasing out bonus depreciation might expose firms to inflation and time value of money factors, potentially resulting in reduced risk-taking.

Keywords: bonus depreciation, investments, risk-taking, taxation, tax policy

JEL Classification: D22, G32, H25, H32