Taxation and Corporate Risk-Taking

Taxation and Corporate Risk-Taking

By
Rebecca Lester, Dominika Langenmayr
The Accounting Review. May
2018, Vol. 93, Issue 3, Pages 237-266

We study whether the corporate tax system provides incentives for risky firm investment. We analytically and empirically show two main findings: first, risk-taking is positively related to the length of tax loss periods because the loss rules shift some risk to the government; and second, the tax rate has a positive effect on risk-taking for firms that expect to use losses, and a weak negative effect for those that cannot. Thus, the sign of the tax effect on risky investment hinges on firm-specific expectations of future loss recovery.