Taxation and Corporate Risk-Taking

We study whether the corporate tax system provides incentives for risky firm investment. We first model the effects of corporate tax rates and tax loss offset rules on firm risk-taking. Testing the theoretical predictions, we find that firm risk-taking is positively related to the length of tax loss periods. This result occurs because the loss rules shift a portion of investment risk to the government, inducing firms to increase their overall level of risk-taking. Moreover, the corporate tax rate has a positive effect on risk-taking for firms that can expect to use their tax losses, and a negative effect for those that cannot. Thus, the effect of taxes on risky investment decisions varies among firms, and its sign hinges on firm-specific expectations of future tax loss recovery