Taxation and Corporate Risk Taking
We study whether the corporate tax system provides incentives for risky firm investment. We analytically and empirically show two main findings: first, risktaking is positively related to the length of tax loss periods because the loss rules shift some risk to the government; and second, the tax rate has a positive effect on risk taking for firms that expect to use losses, and a negative effect for those that cannot. Thus, the sign of the tax effect on risky investment hinges on firm specific expectations of future loss recovery.