Financial Constraints and Future Tax Outcome Volatility
Journal of Business, Finance & Accounting
44 Pages Posted: 4 Jul 2016 Last revised: 25 Aug 2020
Date Written: August 24, 2020
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: Suggested Citation