Sharing risk with the government : on the causal effects of taxes on corporate risk-taking

Author / Creator

Ljungqvist, Alexander author

Available as

Online

Summary

Using a natural experiment in the form of 113 staggered changes in corporate income tax rates across U.S. states, we provide causal evidence on how taxes affect corporate risk-taking decisions. Hig...

Using a natural experiment in the form of 113 staggered changes in corporate income tax rates across U.S. states, we provide causal evidence on how taxes affect corporate risk-taking decisions. Higher taxes are expected to reduce the expected profit per unit of risk, as the government shares in a firm's upside but not in its downside. Consistent with this prediction, we find that firms respond to tax increases by reducing risk. We find no corresponding sensitivity to tax cuts, suggesting that firms find it easier to reduce risk than to increase it. Tax loss-offset rules moderate firms' sensitivity to taxes by allowing firms to partly share downside risk with the government.

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