Conservative accounting yields excessive risk-taking; a note

Becker, Johannes and Steinhoff, Melanie (2013) Conservative accounting yields excessive risk-taking; a note. Centre for Business Taxation WP 13/04.

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We analyse the role of business taxation for corporate risk-taking under different accounting principles. We build a model in which investors have complete information and markets are perfect. A representative risk-neutral firm invests in one unit of an asset choosing from a continuum of assets differing in income and risk properties. The corporate tax base is determined following specific accounting principles (such as mark-to-market, lower-of-cost-or-market and historical cost). We demonstrate that conservative accounting may imply incentives to overinvest in risky assets. If tax loss offset opportunities are less than perfect, the mark-to-market principle penalizes risky investment whereas more conservative accounting leaves the risk choice unaffected.

Item Type: Other Working Paper
Keywords: accounting; risk-taking; business taxation; corporate investment
Centre: Oxford University Centre for Business Taxation > CBT Working Papers
Date Deposited: 10 Oct 2013 15:30
Last Modified: 09 Sep 2016 13:24

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