Do Financing Constraints Lead to Incremental Tax Planning? Evidence from the Pension Protection Act of 2006

Posted: 28 Mar 2021

See all articles by John L. Campbell

John L. Campbell

University of Georgia - J.M. Tull School of Accounting

Nathan C. Goldman

North Carolina State University - Department of Accounting

Bin Li

University of Houston - Department of Accountancy & Taxation

Multiple version iconThere are 2 versions of this paper

Date Written: March 10, 2021

Abstract

Over the last three decades, academic research has sought to understand how cash shortfalls impact a firm’s ability to take all available value-increasing investment projects. We investigate whether firms facing greater financing constraints turn to tax strategies that generate lower cash effective tax rates (ETRs) to mitigate the adverse effect of these financing constraints. We use the Pension Protection Act of 2006 (PPA 2006) as an exogenous shock to financing constraints for pension firms, but not for other firms. Using a difference-in-differences research design, we predict and find that pension firms experience a decrease in their cash ETRs by 1.8 to 2.4 percentage points after the PPA 2006, relative to other firms. These cash tax savings mitigate the investment shortfall brought about by financing constraints by 19%. We also predict and find that the decline in cash ETRs is greater among firms more adversely affected by the PPA 2006. Our paper sheds light on the direction, causality, and economic magnitude of the association between financing constraints and tax planning activities. We also provide insight into the role of tax planning activities within firms’ broader corporate business strategies in responding to financing constraints.

Keywords: financing constraints, tax planning, Pension Protection Act of 2006, off-balance sheet financing, investment

Suggested Citation

Campbell, John L. and Goldman, Nathan C. and Li, Bin, Do Financing Constraints Lead to Incremental Tax Planning? Evidence from the Pension Protection Act of 2006 (March 10, 2021). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3812219

John L. Campbell

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

Nathan C. Goldman (Contact Author)

North Carolina State University - Department of Accounting ( email )

Raleigh, NC 27695-8113
United States

Bin Li

University of Houston - Department of Accountancy & Taxation ( email )

Bauer College of Business
4800 Calhoun Road
Houston, TX 77204
United States

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