Do Country Risk Factors Attenuate the Effect of Taxes on Corporate Risk-Taking?

This study investigates whether country risk factors, including political and fiscal budget risk,
attenuate the effectiveness of tax policy tools that aim to encourage corporate risk-taking.
Exploiting a cross-country panel, we predict and find that the effectiveness of loss offset rules and
tax rate changes is fully attenuated for firms located in high-risk countries. We document the
attenuating effect of country risk is more pronounced in high-tax countries or when countries
increase their corporate tax rate. Additional tests around the U.S. federal budget crises from 2011
to 2013 indicate that temporarily heightened fiscal budget risk attenuates the effectiveness of loss
offset rules even in countries with low political risk. We identify conditions (low political and low
fiscal budget risk) under which targeted tax policy tools effectively stimulate risk-taking. This
suggests that ensuring taxpayers receive tax refunds is important in times of economic crises with
budgetary or political challenges.