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Economic policy uncertainty and firm tax avoidance

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  • My Nguyen
  • Justin Hung Nguyen

Abstract

We find strong evidence that firms reduce cash effective tax rate when economic policy uncertainty heightens. Firms also engage in more aggressive forms of tax avoidance including long‐term tax planning or shelters. Cash holdings attenuate the negative effect of policy uncertainty on cash effective tax rate, especially for financially constrained firms. The cash tax savings are retained for reinvestments rather than dividend payouts. Our findings suggest that policy uncertainty exacerbates external financing frictions, which in turn induces precautionary motives of tax avoidance.

Suggested Citation

  • My Nguyen & Justin Hung Nguyen, 2020. "Economic policy uncertainty and firm tax avoidance," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3935-3978, December.
    • Handle: RePEc:bla:acctfi:v:60:y:2020:i:4:p:3935-3978
    DOI: 10.1111/acfi.12538
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