Economic Policy Uncertainty and Firm Tax Avoidance
Accounting & Finance
51 Pages Posted: 13 Dec 2017 Last revised: 4 Jan 2021
Date Written: December 3, 2017
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: Suggested Citation