Real Effects of Tax Uncertainty: Evidence from Firm Capital Investments

69 Pages Posted: 3 Nov 2014 Last revised: 18 Sep 2020

See all articles by Martin Jacob

Martin Jacob

WHU - Otto Beisheim School of Management

Kelly Wentland

George Mason University - Department of Accounting

Scott Wentland

Bureau of Economic Analysis (BEA)

Date Written: September 17, 2020

Abstract

This paper examines whether tax uncertainty can alter investment decisions, focusing primarily on the timing of large capital investments. We exploit the staggered implementation of a discrete policy change (Schedule UTP) expected to increase tax uncertainty, finding that, on average, firms responded by delaying large capital investments. This effect is stronger for firms where the policy treatment was particularly germane, for firms with more material UTBs or with low to moderate quality public accounting information. We also test the underlying mechanism, two channels connected to financing costs. First, we find managers buffer against higher tax uncertainty with cheaper sources of financing or cash, leading to an investment effect concentrated among financially constrained firms. Second, we document that Schedule UTP reduces the sensitivity of investment to growth opportunities (investment-Q sensitivity) in line with a higher hurdle rate for firms facing higher tax uncertainty.

Keywords: capital investment, intermittent investment, tax uncertainty, financial constraints, Schedule UTP, FIN 48

JEL Classification: D81, G11, H25

Suggested Citation

Jacob, Martin and Wentland, Kelly and Wentland, Scott, Real Effects of Tax Uncertainty: Evidence from Firm Capital Investments (September 17, 2020). Available at SSRN: https://ssrn.com/abstract=2518243 or http://dx.doi.org/10.2139/ssrn.2518243

Martin Jacob

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/steuer

Kelly Wentland (Contact Author)

George Mason University - Department of Accounting

Fairfax, VA
United States

Scott Wentland

Bureau of Economic Analysis (BEA) ( email )

1441 L Street NW
Washington, DC 20910
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
641
Abstract Views
3,756
rank
45,569
PlumX Metrics