Financial Constraints and Cash Tax Savings

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.

Corporate Governance, Tax Avoidance, and Financial Constraints

“…By focusing on the impact of corporate tax avoidance on financial constraints, our study differs importantly from the prior literature that investigates how financial constraints affect a firm's tax avoidance behavior (Law and Mills, 2015;Edwards et al, 2016). By focusing on the impact of corporate tax avoidance on financial constraints, our study differs importantly from the prior literature that investigates how financial constraints affect a firm's tax avoidance behavior (Law and Mills, 2015;Edwards et al, 2016).…”

“…First, by taking an agency perspective, our study complements the recent literature on financial constraints and tax avoidance (Law and Mills, 2015;Edwards et al, 2016) and the role of corporate governance in increasing firm value through tax avoidance (Desai andDharmapala, 2006, 2009;Minnick and Noga, 2010). First, by taking an agency perspective, our study complements the recent literature on financial constraints and tax avoidance (Law and Mills, 2015;Edwards et al, 2016) and the role of corporate governance in increasing firm value through tax avoidance (Desai andDharmapala, 2006, 2009;Minnick and Noga, 2010).…”

Agressividade Tributária: Um Survey da Literatura

“…Trabalhos mais recentes têm destacado a influência de algumas características da empresa no seu perfil agressividade fiscal, são elas: a qualidade do ambiente informacional da empresa (Gallemore & Labro, 2015); a demora na publicação das demonstrações (Rodrigues, 2017); a predisposição para refazimento de demonstrações financeiras (Ramos, 2017); a eficiência dos mecanismos de controle interno (Martinez, Ribeiro & Funchal, 2015;De Simone, Ege & Stomberg, 2015;Bauer, 2016), a eficiência empresarial na utilização dos recursos (Paste Junior, 2017); as estratégias de negócios e os ciclos de vida das empresas (Higgins, Omer & Phillips, 2015;Silva & Rezende, 2017); as restrições financeiras as quais as empresas estão submetidas (Law & Mills, 2015;Edwards, Schwab & Shevlin, 2016;Da Silva & Martinez, 2017;Richardson, Taylor & Lanis, 2015); as transações com partes relacionas no exterior ; e a utilização dos paraísos fiscais como mecanismo para redução da tributação explícita (Lee, 2017;Dyreng & Lindsey, 2009;Dyreng, Lindsey, Markle & Shackelford, 2015;Taylor & Richardson, 2012). Esses estudos buscam identificar características das firmas que conduzem uma maior ou menor agressividade tributária.…”

Industrial Policy and Tax Avoidance

“…Edwards et al (2016) [16] studied the effect of financing constraints on corporate tax avoidance. They pioneered the construction of macro indicators and micro indicators to measure financial constraints.…”

“…Edwards et al (2016) [16] examined the impact of financing constraints on corporate tax avoidance and found that the greater the financing constraints the firm faces, the higher its tax avoidance level.…”