Financial Constraints and Future Tax Outcome Volatility
49 Pages Posted: 4 Jul 2016 Last revised: 25 Jul 2019
Date Written: July 24, 2019
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
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