Title: Sharing Risk with the Government: How Taxes Affect Corporate Risk Taking
Abstract: Journal of Accounting ResearchVolume 55, Issue 3 p. 669-707 Original Article Sharing Risk with the Government: How Taxes Affect Corporate Risk Taking ALEXANDER LJUNGQVIST, ALEXANDER LJUNGQVIST Stern School of Business, New York University, and NBERSearch for more papers by this authorLIANDONG ZHANG, LIANDONG ZHANG College of Business, City University of Hong KongSearch for more papers by this authorLUO ZUO, LUO ZUO Johnson Graduate School of Management, Cornell UniversitySearch for more papers by this author ALEXANDER LJUNGQVIST, ALEXANDER LJUNGQVIST Stern School of Business, New York University, and NBERSearch for more papers by this authorLIANDONG ZHANG, LIANDONG ZHANG College of Business, City University of Hong KongSearch for more papers by this authorLUO ZUO, LUO ZUO Johnson Graduate School of Management, Cornell UniversitySearch for more papers by this author First published: 01 November 2016 https://doi.org/10.1111/1475-679X.12157Citations: 90 Accepted by Christian Leuz. We gratefully acknowledge helpful comments from two anonymous reviewers; Morten Bennedsen, Nathan Goldman, Abhiroop Mukherjee, and Stefan Zeume (our discussants); Eli Bartov, Sanjeev Bhojraj, Robert Bloomfield, Agnes Cheng, Robert Engle, Michelle Hanlon, Shane Heitzman, Sudarshan Jayaraman, Andrew Karolyi, Anne Marie Knott, Clive Lennox, Ji-Chai Lin, Kenneth Merkley, Jeffrey Ng, Joseph Piotroski, Mark Soliman, K.R. Subramanyam, Ross Watts, John Wei, Haibin Wu, Eric Yeung, Paul Zarowin, and Zilong Zhang; as well as participants at various seminars and conferences. We thank Charles Choi and Chuchu Liang for competent research assistance. Zuo gratefully acknowledges generous financial support from the Institute for the Social Sciences at Cornell University. An online appendix to this paper can be downloaded at http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements. Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat ABSTRACT 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. Citing Literature Volume55, Issue3June 2017Pages 669-707 RelatedInformation