Political Connections, Financial Constraints, and Corporate Taxation

70 Pages Posted: 17 Aug 2021 Last revised: 29 Apr 2022

See all articles by Ke Na

Ke Na

Cheung Kong Graduate School of Business

Terry J. Shevlin

University of California-Irvine; University of California-Irvine

Youan Wang

The University of Hong Kong

Zigan Wang

The University of Hong Kong - School of Economics and Finance; Columbia University

Date Written: March 1, 2021

Abstract

Prior literature shows that politically connected firms engage in greater tax planning. We argue that this relation is moderated when firms are financially constrained. Specifically, we hypothesize that political connections help constrained firms access external financing and consequently reduce these firms’ incentives to use tax planning, ie., tax savings, as a source of internal financing. We find that after a plausibly exogenous increase in political connections arising from close congressional elections, although financially unconstrained firms increase their tax planning, constrained firms decrease it. Constrained firms are also more likely to obtain new bank loans and issue new public bonds, and the costs of debt are significantly lower after increases in political connections. We further show that decreases in tax planning are more pronounced for constrained firms that obtain new bank loans and issue public bonds, and when the connected politicians serve on the banking-related committees. Collectively, our paper highlights the importance of financial constraints in understanding the tax planning of politically connected firms.

Keywords: Political connections, corporate tax planning, financial constraints, external financing

Suggested Citation

Na, Ke and Shevlin, Terry J. and Shevlin, Terry J. and WANG, Youan and Wang, Zigan, Political Connections, Financial Constraints, and Corporate Taxation (March 1, 2021). Available at SSRN: https://ssrn.com/abstract=3893274 or http://dx.doi.org/10.2139/ssrn.3893274

Ke Na (Contact Author)

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Terry J. Shevlin

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA 92697-3125
United States
949-824-6149 (Phone)

Youan WANG

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong
China
59353876 (Phone)

Zigan Wang

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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