Article

The Effect of Tax Policies on Corporate Risk-Taking: Evidence from Bonus Depreciation

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This study examines corporate risk-taking decisions in response to corporate taxable income shifts in the United States. I exploit bonus depreciation, a tax policy implemented in 2001 that induced industry-specific variation in accelerated depreciation schedules, to implement a Difference-in-Differences framework. The findings show that the average U.S. public firm increases risk by 23% - 25% in response to bonus depreciation. Corporate taxation creates a disconnect between tax and economic depreciation, but bonus depreciation bridges the gap. Hence, the tax policy reduces exposure to economic depreciation shocks, and firms respond by investing in assets with uncertain replacement costs. I also predict and find that the response is stronger for small and financially constrained firms, low productivity firms, and firms without tax loss carryforwards. The results imply that phasing out bonus depreciation might expose firms to economic depreciation uncertainty shocks, and potentially come at the expense of reduced risk-taking.
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