Financial Constraints and Cash Tax Savings

Alexander S. Edwards · Casey M. Schwab · Terry J. Shevlin

624 citations0/0 files storedThe Accounting Review

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Corporate Taxation and Avoidance Corporate Finance and Governance Working Capital and Financial Performance

Abstract

ABSTRACT We investigate the association between financial constraints and cash savings generated through tax planning. We predict that an increase in financial constraints leads firms to increase internally generated funds via tax planning. We measure financial constraints based on changes in firm-specific and macroeconomic measures. We find that firms facing increases in financial constraints exhibit increases in cash tax planning. Our results indicate that among profitable firms, firm-years with the largest increases in firm-specific constraints are associated with declines in firms' cash effective tax rates ranging from 3.00 to 5.14 percent, which equate to between 2.87 and 4.82 percent of operating cash flows. We also find that (1) the impact of financial constraints on tax planning is greatest among firms with low cash reserves, and (2) constrained firms achieve a substantial portion of their current tax savings via deferral-based tax planning strategies, despite the lack of a financial statement benefit. JEL Classifications: E69; H25; H60. Data Availability: Data used in this study are available from public sources identified in the paper.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1997Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?2005The economic implications of corporate financial reporting 2002Testing Trade-Off and Pecking Order Predictions About Dividends and Debt 2010A review of tax research 2001Forecasting Bankruptcy More Accurately: A Simple Hazard Model 2008Long-Run Corporate Tax Avoidance 2007Are Family Firms More Tax Aggressive Than Non-Family Firms?

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2017Changes in corporate effective tax rates over the past 25 years 2016Is Tax Avoidance Related to Firm Risk?2016The Role of Managerial Ability in Corporate Tax Avoidance 2013The Effect of Corporate Tax Avoidance on the Cost of Equity 2020Navigating through economic policy uncertainty: The role of corporate cash holdings 2018Perspectives on Corporate Tax Planning: Observations from the Past Decade

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