Sharing Risk with the Government: How Taxes Affect Corporate Risk Taking / Alexander Ljungqvist, Liandong Zhang, Luo Zuo.

Format:

Book

Author/Creator:

Ljungqvist, Alexander.

Contributor:

National Bureau of Economic Research.

Zhang, Liandong.

Zuo, Luo.

Series:

Working Paper Series (National Bureau of Economic Research) no. w21834.

NBER working paper series no. w21834

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Sharing Risk with the Government

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2015.

Summary:

Using 113 staggered changes in corporate income tax rates across U.S. states, we provide evidence on how taxes affect corporate risk-taking decisions. Higher taxes reduce expected profits more for risky projects than for safe ones, as the government shares in a firm's upside but not in its downside. Consistent with this prediction, we find that risk taking is sensitive to taxes, albeit asymmetrically: the average firm reduces risk in response to a tax increase (primarily by changing its operating cycle and reducing R&D risk) but does not respond to a tax cut. We trace the asymmetry back to constraints on risk taking imposed by creditors. Finally, tax loss-offset rules moderate firms' sensitivity to taxes by allowing firms to partly share downside risk with the government.

Notes:

Print version record

December 2015.