Taxes and risk-taking behavior: evidence from mergers and acquisitions in the G7 nations
ISSN: 1526-5943
Article publication date: 7 August 2018
Issue publication date: 10 August 2018
Abstract
Purpose
This study aims to examine how corporate taxes affect corporate risk-taking decisions.
Design/methodology/approach
This study examines corporate risk-taking by analyzing how a firm’s asset risk changes following an acquisition carried out by publicly listed companies in the G7 nations. To measure the asset risk of a firm, this study uses the option pricing framework in Merton (1974).
Findings
Consistent with an implication of the Merton (1974) framework, the findings show that firms take more risk in their investment decisions when tax rates are high. Moreover, the tax effects wane for firms with a relatively large borrowing opportunity and this suggests that the risk-taking incentive from taxes is moderated by the reputation concern in the debt market, lending support to the Diamond (1989) reputation-building model. The empirical results also show that the tax-induced risk-taking incentive is restrained by creditor rights. Overall, the study reveals an important role of taxes in the structure of corporate investment decisions.
Practical implications
The implications of this study can be beneficial to policymakers when considering the alteration of tax rates, as it will affect the riskiness of firm investment decisions.
Originality/value
This study provides a better understanding of the role of taxes on risk-taking and also contributes to the growing body of evidence supporting tax effects of risk-taking. The relationship between taxes and risk-taking has proven that the corporate taxation is one of the key factors that firms consider during their selection of risky investments. Unlike previous studies, this research is the first to investigate the change in asset risk, estimating by the option pricing framework, through studying a particular event: mergers and acquisitions.
Keywords
Acknowledgements
The author would like to thank Bonnie Buchanan (the editor), anonymous referees, Manapol Ekkayokkaya, Christian Wolff, Sira Suchintabandid, Anant Chiarawongse, Thaisiri Watewai, Shih-tse Lo, Dhanoos Sutthiphisal and Zhuoran Zhang for valuable comments and suggestions. All remaining errors are his own.
This paper is part of author’s doctoral dissertation at Chulalongkorn University.
Citation
Sreesing, P. (2018), "Taxes and risk-taking behavior: evidence from mergers and acquisitions in the G7 nations", Journal of Risk Finance, Vol. 19 No. 3, pp. 277-294. https://doi.org/10.1108/JRF-12-2016-0170
Publisher
:Emerald Publishing Limited
Copyright © 2018, Emerald Publishing Limited