Real Effects of Tax Uncertainty: Evidence from Firm Capital Investments

Martin Jacob (), Kelly Wentland () and Scott A. Wentland ()
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Martin Jacob: WHU – Otto Beisheim School of Management, 56179 Vallendar, Germany
Kelly Wentland: George Mason University, Fairfax, Virginia 22030
Scott A. Wentland: Bureau of Economic Analysis, Washington, District of Columbia 20233

Management Science, 2022, vol. 68, issue 6, 4065-4089

Abstract: This paper examines whether tax uncertainty can alter investment decisions, focusing primarily on the timing of large capital investments. Empirically, we exploit the staggered implementation of Schedule UTP, a discrete policy change expected to increase tax uncertainty, finding that, on average, firms responded by delaying large capital investments. This effect is stronger among firms at which the policy treatment is particularly germane, that is, for firms with more material UTBs or with low-to-moderate quality public accounting information. We also test the underlying mechanism, finding that managers buffer against higher tax uncertainty with cheaper sources of financing (cash) and that the investment effect is concentrated among financially constrained firms. The results show that Schedule UTP also reduces the sensitivity of investment to growth opportunities (investment-Q sensitivity) in line with a higher hurdle rate for firms facing higher tax uncertainty.

Keywords: capital investment; large investment; tax uncertainty; financial constraints; Schedule UTP; FIN 48 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:6:p:4065-4089

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