Investment Opportunity Sets, Operating Uncertainty, and Capital Market Pressure: Determinants of Investments in Tax Shelter Activities?

Abstract

This study examines whether factors that influence firms’ overall investment strategies also influence the decision to invest in a tax shelter. Our results suggest that firms with large investment opportunity sets are less likely to invest in tax shelters. We also find that firms with greater operating uncertainty are less likely to invest in tax shelters. Finally, we find that firms with greater capital market pressure are more likely to invest in tax sheltering activities. In combination, our evidence suggests that the likelihood that a firm will invest in tax sheltering activities is a function of its overall investment strategy.

Keywords: tax shelter, investment opportunity set, operating uncertainty, capital market expectations

JEL Classification: H25, H26, M41