Aggressive Tax Planning and Labor Investments

Journal of Accounting, Auditing, and Finance, Forthcoming

42 Pages Posted: 4 May 2021 Last revised: 7 Mar 2022

See all articles by Simone Traini

Simone Traini

NHH Norwegian School of Economics - Department of Accounting, Auditing and Law

Nathan C. Goldman

North Carolina State University - Department of Accounting

Christina Lewellen

North Carolina State University - Department of Accounting

Date Written: February 23, 2022

Abstract

We examine the association between aggressive tax planning and labor investment efficiency among U.S. firms. Labor is an important input to production that is material to many firms, and prior research suggests that inefficient labor investments can negatively affect future profitability and growth. We provide evidence that firms engaging in aggressive tax planning are associated with deviations from expected labor investments, which is indicative of labor investment inefficiency. We find that our results are concentrated in labor underinvestment, consistent with risks and uncertainties from aggressive tax planning making firms more cautious when investing. Our findings are strongest among firms with greater tax risk, higher labor costs, and weaker corporate governance. Our study contributes to the literature examining tax planning consequences by providing evidence that a tradeoff exists between aggressive tax planning and investments in labor. Therefore, our results suggest that managers should carefully consider the cash flow benefits of tax planning in conjunction with the potential effects of lower labor investments to ensure that the overall long-term effect of the tax strategy is value-increasing.

Keywords: Tax planning; tax uncertainty; labor investment

JEL Classification: H26; D81; J23, M40, M41

Suggested Citation

Traini, Simone and Goldman, Nathan C. and Lewellen, Christina, Aggressive Tax Planning and Labor Investments (February 23, 2022). Journal of Accounting, Auditing, and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3837407 or http://dx.doi.org/10.2139/ssrn.3837407

Simone Traini

NHH Norwegian School of Economics - Department of Accounting, Auditing and Law ( email )

Helleveien 30
Bergen, 5045
Norway

Nathan C. Goldman (Contact Author)

North Carolina State University - Department of Accounting ( email )

Raleigh, NC 27695-8113
United States

Christina Lewellen

North Carolina State University - Department of Accounting ( email )

Raleigh, NC 27695-8113
United States

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