Taxation and Corporate Risk-Taking

Abstract

We study whether the corporate tax system provides incentives for risky firm investment. We first model the effects of corporate tax rates and tax loss offset rules on firm risk-taking. Testing the theoretical predictions, we find that firm risk-taking is positively related to the length of tax loss periods. This result occurs because the loss rules shift a portion of investment risk to the government, inducing firms to increase their overall level of risk-taking. Moreover, the corporate tax rate has a positive effect on risk-taking for firms that can expect to use their tax losses, and a negative effect for those that cannot. Thus, the effect of taxes on risky investment decisions varies among firms, and its sign hinges on firm-specific expectations of future tax loss recovery.

The Effects of Competition from S Corporations on the Organizational Form Choice of Rival C Corporations

“…The tax benefits of NOLs affect many decisions (e.g., Langenmayr and Lester ). Consistent with Hodder et al (), we control for NOL carrybacks by defining banks with zero or negative tax expense as having a net operating loss, provided the sum of tax expense in year t − 1 and t − 2 does not exceed the negative tax expense in the current year.…”

The Effect of Loss-Offset Provisions on the Asymmetric Behavior of Corporate Tax Revenues in the Business Cycle

“…For instance,Dreßler and Overesch (2013) andBethmann, Jacob, and Müller (2018) show that investment of loss-making firms depends on how restrictive the loss-offset provisions are. In particular,Bethmann, Jacob, and Müller (2018) andLangenmayr and Lester (2018) find that this investment response is related to the risky nature of investment decisions.…”