No. 28: Do country risk factors attenuate the effect of taxes on corporate risk-taking?

Abstract

This study investigates whether country risk factors, including political and fiscal budget
risk, attenuate the effectiveness of tax policy tools that aim to encourage corporate risk-taking.
Exploiting a cross-country panel, we predict and find that the effectiveness of loss offset rules and
tax rate changes is fully attenuated for firms located in high-risk countries. We document the
attenuating effect of country risk is more pronounced in high-tax countries or when countries
increase their corporate tax rate. Additional tests around the U.S. federal budget crises from 2011
to 2013 indicate that temporarily heightened fiscal budget risk attenuates the effectiveness of loss
offset rules even in countries with low political risk. We identify conditions (low political and low
fiscal budget risk) under which targeted tax policy tools effectively stimulate risk-taking. This
suggests that ensuring taxpayers receive tax refunds is important in times of economic crises with
budgetary or political challenges.

Participating Institutions

TRR 266‘s main locations are Paderborn University, HU Berlin, and University of Mannheim. All three locations have been centers for accounting and tax research for many years. They are joined by researchers from LMU Munich, Frankfurt School of Finance and Management, WHU – Otto Beisheim School of Management, European School of Management and Technology in Berlin and Goethe University Frankfurt who share the same research agenda.