Question

For investors, changes made to the tax code by the government are known as a form of:______.

Answer 1

For investors, changes made to the tax code by the government are known as a form legislative risk, which results from changes in law.

Legislative risk refers to the possibility that government legislation or regulations will significantly alter the business prospects of one or more companies. These changes may have a negative impact on the firm's investment holdings. The legislative risk may occur as a direct result of government action or by changing customer demand patterns. Investors rarely complain about preferential treatment and bailouts for specific industries, possibly because they all work with the secret hope of profiting from them.

What subsidies and tariffs can give an industry in terms of competitive advantages, regulation and taxation can take away from many others. They can send shockwaves around the world and destroy companies and entire industries with a single law, subsidy, or switch of the printing press. As a result, many investors consider legislative risk to be a major factor when evaluating stocks.

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