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Financial constraints and future tax outcome volatility
Author(s) -
Akamah Herita T.,
Omer Thomas C.,
Shu Sydney Qing
Publication year - 2020
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12495
Subject(s) - volatility (finance) , monetary economics , economics , tax credit , cash , tax reform , finance , business , public economics
We investigate whether variation in the volatility of tax outcomes across firms is associated with the extent of financial constraints. We document a positive association between current‐period financial constraints and the volatility of cash effective tax rates in subsequent periods. We find that this positive association becomes more pronounced as firms avoid more cash taxes. These results suggest that as financial constraints increase, the benefits of cash tax savings more likely outweigh the costs associated with more volatile tax outcomes. Recent research documents a negative association between financial constraints and the level of cash taxes paid. Our evidence suggests that tax strategies adopted by more financially constrained firms to increase cash tax savings come at the price of more volatile future tax rates.