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 (Coordinating 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.