Real Effects of Tax Uncertainty: Evidence from Firm Capital Investments
69 Pages Posted: 3 Nov 2014 Last revised: 18 Sep 2020
Date Written: September 17, 2020
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: Suggested Citation