The economics of managerial taxes and corporate risk-taking

• Main Authors: ARMSTRONG, Chris, GLAESER, Stephen, HUANG, Sterling, TAYLOR, Daniel
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Corporate risk-taking; Risky investment; Risk-taking incentives; Personal income taxes; Federal income taxes; State income taxes; Agency conflicts; Accounting; Corporate Finance; Taxation
• Online Access: https://ink.library.smu.edu.sg/soa_research/1793; https://ink.library.smu.edu.sg/context/soa_research/article/2820/viewcontent/The_Economics_of_Managerial_Taxes_and_Corporate_Risk_Taking__The_Accounting_Review_94_pages_1_24.pdf
• Institution: Singapore Management University

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’ personal income taxes influence their corporate risk-taking decisions.