Political Connections, Financial Constraints, and Corporate Taxation

66 Pages Posted: 17 Aug 2021 Last revised: 2 Sep 2021

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

We argue that political connections help financially constrained firms access external financing and consequently reduce their incentives to use tax planning as a source of internal financing. Consistent with this argument, 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. The decrease in tax planning is more pronounced when the connected politicians serve on the banking-related committees. Constrained firms also experience significant decreases in costs of equity capital, bank loan spreads, and bond yields and receive more government contracts after obtaining more political connections, supporting the idea that alleviating firms’ financial constraints is the mechanism through which political connections affect the tax planning of constrained firms. 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 92697-3125
United States
949-824-6149 (Phone)

University of California-Irvine ( email )

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