The Impact of Tax Rates on Corporate Risk-Taking

Abstract

According to transfer pricing rules, the allocation of assets, functions and risks within multinational companies determines the distribution of profits. This gives multinationals the incentive to shift valuable assets, complex functions and high risks to low tax countries. Whereas the literature has extensively studied the allocation of assets and debt within multinationals, I shed light on the intra-group allocation of risk. First, I outline how intragroup risk shifting can be conducted in different industries. Second, by using a dataset of unconsolidated financial statements, I show that subsidiaries’ level of risk is significantly affected by the statutory tax rate. This holds especially true for manufacturing groups and their subsidiaries in the service industry. Third, I show that for a matched sample of stand-alone companies, their level of risk is also affected by the statutory tax rate.