Economic Policy Uncertainty and Firm Tax Avoidance

Accounting & Finance

51 Pages Posted: 13 Dec 2017 Last revised: 4 Jan 2021

See all articles by Justin Hung Nguyen

Justin Hung Nguyen

Victoria University of Wellington

My Nguyen

RMIT- School of Economics, Finance and Marketing

Date Written: December 3, 2017

Abstract

We find strong evidence that firms reduce cash effective tax rate when economic policy uncertainty heightens. Firms also engage in more aggressive forms of tax avoidance including long-term tax planning or shelters. Cash holdings attenuate the negative effect of policy uncertainty on cash effective tax rate, especially for financially constrained firms. The cash tax savings are retained for reinvestments rather than dividend payouts. Our findings suggest that policy uncertainty exacerbates external financing frictions, which in turn induces precautionary motives of tax avoidance.

Keywords: Policy uncertainty, tax avoidance, financial constraints

JEL Classification: G18, G31, G32, H26

Suggested Citation

Nguyen, Justin Hung and Nguyen, My, Economic Policy Uncertainty and Firm Tax Avoidance (December 3, 2017). Accounting & Finance , Available at SSRN: https://ssrn.com/abstract=3085770 or http://dx.doi.org/10.2139/ssrn.3085770

Justin Hung Nguyen

Victoria University of Wellington ( email )

23 Lambton Quay
Pipitea
Wellington, 6011
New Zealand

My Nguyen (Contact Author)

RMIT- School of Economics, Finance and Marketing ( email )

445 Swanston Street
Melbourne, Victoria 3001
Australia
+61 3 9925 5450 (Phone)

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