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

Posted: 15 Aug 2013  

Sean T. McGuire

Texas A&M University - Department of Accounting

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Jaron H. Wilde

University of Iowa - Henry B. Tippie College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 2013

Abstract

Prior research documents substantial variation in firms’ tax avoidance activities and questions why some firms choose not to take advantage of the apparent benefits of tax planning (i.e., the "undersheltering puzzle"). We provide additional insight into the undersheltering puzzle by investigating the decision to invest in a tax shelter from the perspective of a firm’s overall investment strategy. We examine whether three factors associated with traditional investment behavior (firms’ investment opportunity sets, operating uncertainty, and capital market pressure) are also associated with investments in tax shelter activities. Our results suggest that firms with large investment opportunity sets and higher operating uncertainty are less likely to invest in tax shelters. We also find that firms with greater capital market pressure are more likely to invest in tax shelter activities. Overall, we find that factors that influence firms’ investment behavior help to explain why more firms do not invest in tax shelters.

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

JEL Classification: H25, H26, M41

Suggested Citation

McGuire, Sean T. and Omer, Thomas C. and Wilde, Jaron H., Investment Opportunity Sets, Operating Uncertainty, and Capital Market Pressure: Determinants of Investments in Tax Shelter Activities? (August 2013). Journal of American Taxation Association, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2310175

Sean T. McGuire (Contact Author)

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Jaron H. Wilde

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

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