Financial Constraints and Future Tax Outcome Volatility

49 Pages Posted: 4 Jul 2016 Last revised: 25 Jul 2019

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: July 24, 2019

Abstract

We investigate whether more financially constrained firms have more volatile future tax outcomes compared to less constrained firms. We document a positive association between current-period financial constraints and the volatility of cash effective tax rates (ETRs) in subsequent periods up to five years. Moreover, we find that this positive association becomes more pronounced as firms increase the level of cash tax savings. These findings suggest that tax strategies adopted by financially constrained firms to reduce cash taxes paid come at the price of more volatile tax rates. We also find evidence that the positive association between financial constraints and future cash ETR volatility is more (less) evident in firms with greater cash needs (increased external financing). This result is consistent with financially constrained firms balancing cash tax saving benefits and the costs associated with volatile tax outcomes.

Keywords: tax outcome volatility; financial constraint; cash taxes; non-tax costs

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 (July 24, 2019). 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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