Financial Constraints and Future Tax Outcome Volatility

Journal of Business, Finance & Accounting

44 Pages Posted: 4 Jul 2016 Last revised: 25 Aug 2020

See all articles by Herita T. Akamah

Herita T. Akamah

University of Nebraska at Lincoln - School of Accountancy

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Sydney Qing Shu

Miami University of Ohio - Department of Accountancy

Date Written: August 24, 2020

Abstract

We investigate whether variation in the volatility of tax outcomes across firms is associated with the extent of financial constraints. We document a positive association between current-period financial constraints and the volatility of cash effective tax rates in subsequent periods. We find that this positive association becomes more pronounced as firms avoid more cash taxes. These results suggest that as financial constraints increase, the benefits of cash tax savings more likely outweigh the costs associated with more volatile tax outcomes. Recent research documents a negative association between financial constraints and the level of cash taxes paid. Our evidence suggests that tax strategies adopted by more financially constrained firms to increase cash tax savings come at the price of more volatile future tax rates.

Keywords: tax rate volatility; financial constraint; cash effective tax rate; cash tax avoidance; tax strategy

JEL Classification: H21; H25; H26; M41

Suggested Citation

Akamah, Herita T. and Omer, Thomas C. and Shu, Sydney Qing, Financial Constraints and Future Tax Outcome Volatility (August 24, 2020). Journal of Business, Finance & Accounting, Available at SSRN: https://ssrn.com/abstract=2803563 or http://dx.doi.org/10.2139/ssrn.2803563

Herita T. Akamah

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

307 College of Business Administration
Lincoln, NE 68588-0488
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

Sydney Qing Shu (Contact Author)

Miami University of Ohio - Department of Accountancy

3094 Farmer School of Business
800 E. High St.
Oxford, OH 45056
United States

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