The Economics of Managerial Taxes and Corporate Risk-Taking
Armstrong, Christopher S., Glaeser, Stephen, Huang, Sterling, Taylor, Daniel J.
The Accounting Review · 2019 · Volume 94 · Issue 1
Abstract
We examine the relation between managers' personal income tax rates and their corporate investment decisions. Using plausibly exogenous variation in federal and state tax rates, we find a positive relation between managers' personal tax rates and their corporate risk-taking. Moreover—and consistent with our theoretical predictions—we find that this relation is stronger among firms with investment opportunities that have a relatively high rate of return per unit of risk, and stronger among CEOs who have a relatively low marginal disutility of risk. Importantly, our results are unique to senior managers' tax rates––we do not find similar relations for middle-income tax rates. Collectively, our findings provide evidence that managers'personalincome taxes influence theircorporaterisk-taking decisions. JEL Classifications:G30; G32; G38; H24; H32. Data Availability:Data are available from the sources cited in the text. Data on manager tax rates used in this paper are available at:http://acct.wharton.upenn.edu/∼dtayl/.
Keywords
corporate risk-taking, risky investment, risk-taking incentives, personal income taxes, federal income taxes, state income taxes, agency conflicts
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