Financial Constraints and Cash Tax Savings

Posted: 19 Oct 2012 Last revised: 15 Sep 2015

See all articles by Alexander Edwards

Alexander Edwards

University of Toronto - Rotman School of Management

Casey M. Schwab

Indiana University - Kelley School of Business - Department of Accounting

Terry J. Shevlin

University of California-Irvine

Multiple version iconThere are 2 versions of this paper

Date Written: September 9, 2015

Abstract

We investigate the association between financial constraints and cash savings generated through tax planning. We predict that an increase in financial constraints leads firms to increase internally-generated funds via tax planning. We measure financial constraints based on changes in firm-specific and macroeconomic measures. We find that firms facing increases in financial constraints exhibit increases in cash tax planning. Our results indicate that among profitable firms, firm-years with the largest increases in firm-specific constraints are associated with declines in firms’ cash effective tax rates ranging from 3.00 to 5.14 percent which equate to between 2.87 and 4.82 percent of operating cash flows. We also find that (1) the impact of financial constraints on tax planning is greatest among firms with low cash reserves and (2) constrained firms achieve a substantial portion of their current tax savings via deferral-based tax planning strategies, despite the lack of a financial statement benefit.

Keywords: Tax avoidance, Cash taxes, Financial constraints

JEL Classification: E69, H25, H60

Suggested Citation

Edwards, Alexander S. and Schwab, Casey M. and Shevlin, Terry J., Financial Constraints and Cash Tax Savings (September 9, 2015). Rotman School of Management Working Paper No. 2163766. Available at SSRN: https://ssrn.com/abstract=2163766 or http://dx.doi.org/10.2139/ssrn.2163766

Alexander S. Edwards (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Casey M. Schwab

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Terry J. Shevlin

University of California-Irvine ( email )

Irvine, CA California 92697-3125
United States
2065509891 (Phone)

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