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Financial constraints and future tax outcome volatility

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  • Herita T. Akamah
  • Thomas C. Omer
  • Sydney Qing Shu

Abstract

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.

Suggested Citation

  • Herita T. Akamah & Thomas C. Omer & Sydney Qing Shu, 2021. "Financial constraints and future tax outcome volatility," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(3-4), pages 637-665, March.
    • Handle: RePEc:bla:jbfnac:v:48:y:2021:i:3-4:p:637-665
    DOI: 10.1111/jbfa.12495
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    2. Sarfraz Khan & Sung‐Jin Park & Stanley Veliotis & John K. Wald, 2023. "Director and officer liability and corporate tax avoidance," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(7-8), pages 1338-1371, July.
    3. Jiaren Pang & Kun Wang & Le Zhao, 2024. "Tax enforcement and corporate cash holdings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 51(9-10), pages 2737-2762, October.
    4. C. S. Agnes Cheng & Bill B. Francis & Zhi Li & Yinjie Shen & Qiang Wu, 2024. "Do creditor control rights impact corporate tax aggressiveness? Evidence from debt covenant violations," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 51(5-6), pages 1084-1119, May.
    5. Shen, Zhihan & Zhang, Ruipeng & Li, Peigong, 2024. "Local government debt and corporate tax avoidance: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 985-1000.

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