Riskier together? The effect of combined tax reporting on corporate risk-taking




Welsch, Anthony

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To constrain tax-motivated income shifting, many U.S. states have enacted combined tax reporting, which effectively requires affiliated corporations under common ownership to compute taxable income on a consolidated basis rather than a separate-entity basis. The rules have similarities to U.S. GAAP and federal income tax consolidated reporting rules. I find that after a state adopts combined reporting, affected firms report higher earnings volatility and R&D expenditures compared to control firms. The results are consistent with combined reporting increasing firm risk-taking by enhancing tax loss offset capabilities. The main effects are attenuated in patent-intensive income-shifting firms, consistent with combined reporting reducing the after-tax payoffs of producing intangible property. Collectively, the evidence provides nuance to recent literature suggesting anti-income shifting policies reduce risk-taking and innovation and is timely given increased combined reporting legislation by U.S. states and related international proposals.



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