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Sharing Risk with the Government: How Taxes Affect Corporate Risk Taking

Alexander Ljungqvist, Liandong Zhang, Luo Zuo

NBER Working Paper No. 21834
Issued in December 2015, Revised in January 2017
NBER Program(s):Corporate Finance

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.

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Document Object Identifier (DOI): 10.3386/w21834

Published: ALEXANDER LJUNGQVIST & LIANDONG ZHANG & LUO ZUO, 2017. "Sharing Risk with the Government: How Taxes Affect Corporate Risk Taking," Journal of Accounting Research, vol 55(3), pages 669-707. citation courtesy of

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