Corporate debt policy and tax uncertainty

Kathleen Petrie Fuller (), Qun Wu () and Serhat Yildiz ()
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Kathleen Petrie Fuller: University of Mississippi
Qun Wu: University of Nevada – Reno
Serhat Yildiz: University of Nevada – Reno

Review of Quantitative Finance and Accounting, 2024, vol. 62, issue 1, No 9, 247-270

Abstract: Abstract The relation between taxes and capital structure has long been studied in academic literature but the relation between tax uncertainty and capital structure remains underexplored. Using a measure of tax uncertainty based on an accounting reserve for contingent tax liability, we find that tax uncertainty is negatively associated with firms’ leverage. In terms of economic significance, the effect of tax uncertainty on capital structure is comparable to that of nondebt tax shields. Our results also show that tax uncertainty is negatively related to debt issuance. The impact of tax uncertainty is more pronounced for firms with more financial constraints and default risks. Overall, our findings highlight a new channel through which tax planning policies affect corporate policies and document that the firm’s tax uncertainty is an important determinant of its capital structure and financing policies. Our results are robust to different empirical specifications and tests.

Keywords: Tax uncertaint; Tax planning; FIN 48; Capital structure; Corporate leverage (search for similar items in EconPapers)
JEL-codes: G32 G38 H25 K22 K34 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11156-023-01202-y

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