Real Effects of Tax Uncertainty: Evidence from Firm Capital Investments

71 Pages Posted: 3 Nov 2014 Last revised: 1 Jul 2021

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: December 8, 2020

Abstract

This paper examines whether tax uncertainty can alter investment decisions, focusing primarily on the timing of large capital investments. Empirically, we exploit the staggered implementation of Schedule UTP, a discrete policy change expected to increase tax uncertainty, finding that, on average, firms responded by delaying large capital investments. This effect is stronger among firms where the policy treatment is particularly germane, for firms with more material UTBs or with low to moderate quality public accounting information. We also test the underlying mechanism, finding that managers buffer against higher tax uncertainty with cheaper sources of financing (cash), and that the investment effect is concentrated among financially constrained firms. The results show that Schedule UTP also 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, large 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 (December 8, 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

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