Do Country Risk Factors Attenuate the Effect of Taxes on Corporate Risk-taking?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. AbstractThis study examines whether country-specific risk attenuates the association between tax policies and corporate risk-taking. We define country-specific risk (political and fiscal budget risk) as taxpayer's risk that tax refunds on losses cannot be paid due to the institutional environment or fiscal reasons. We exploit a cross-country panel with 234 changes in corporate tax rates and 49 changes in loss offset rules. We investigate whether government risk-sharing via loss offset rules and tax rates affects risk-taking conditional on country risk. We also examine whether tax rate changes, that scale the risk-sharing effect, influence the propensity to conduct risky projects in different country-level risk environments. Our results suggest that country-level risk fully attenuates the previously documented association between tax policies and corporate risk-taking. It attenuates both the effectiveness of loss offset rules and tax rate changes on corporate risk-taking. While changes in tax policy are attractive to policymakers because alternative instruments to encourage risk-taking cannot as easily be adjusted, we provide significant evidence that country risk considerably limits policymakers' ability to induce firm risk-taking via changes in tax policies.

Turnover-Based Corporate Income Taxation and Corporate Risk-Taking

“…The resulting measure captures the deviation of the firm's ROA from the average ROA in industry j in year t, and the volatility of this deviation over three years. Consistent with prior research (Acharya et al, 2011;John et al, 2008;Langenmayr & Lester, 2018;Osswald & Sureth-Sloane, 2020), we measure Risk over the years t to t+2. Greater deviations/higher volatility represent greater risk-taking.…”

“…While it is clear that an income tax reduces the return of an investment, it is less obvious how it affects risk-taking. If loss offset provisions are in place, an investor is able to share risk with the government (Domar & Musgrave, 1944;Langenmayr & Lester, 2018;Ljungqvist et al, 2017;Osswald & Sureth-Sloane, 2020). Specifically, through a loss offset, the government compensates the investor for a loss by reducing its future tax payment (loss carryforward) or refunding its past tax payment (loss carryback).…”

“…Therefore, it is important to understand whether and to what extent TbCIT regimes affect firms' risky investments. Prior theoretical and empirical research (Domar & Musgrave, 1944;Feldstein, 1969;Langenmayr & Lester, 2018;Ljungqvist et al, 2017;Osswald & Sureth-Sloane, 2020) shows that both tax rate and loss offset rules affect corporate risk-taking. These studies, however, are limited to a common form of corporate taxation-the profit-based corporate income tax (PbCIT)-that taxes profits while providing loss offset opportunities.…”

“…PbCIT. Prior studies (Domar & Musgrave, 1944;Feldstein, 1969;Stiglitz, 1975;Langenmayr & Lester, 2018;Ljungqvist et al, 2017;Osswald & Sureth-Sloane, 2020) find that the combination of tax rates and loss-offset rules have significant effects on corporate risk-taking.…”

Essays on the Real Effects of Tax Reforms

“…96 In Panel C, I distinguish between treated banks domiciled in a country with a government quality index above the median (High quality) and below the median (Low quality) in the pre-reform period. I obtain data on the government quality from the worldwide governance indicators provided by the World Bank (e.g., Dharmapala and Hines, 2009;Osswald and Sureth-Sloane, 2020). I calculate the government quality index for each country as the mean of the three indicators: government effectiveness, regulatory quality and rule of law in the pre-reform period.…”