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Real Effects of Tax Uncertainty: Evidence from Firm Capital Investments

Author

Listed:
  • 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)

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.

Suggested Citation

  • Martin Jacob & Kelly Wentland & Scott A. Wentland, 2022. "Real Effects of Tax Uncertainty: Evidence from Firm Capital Investments," Management Science, INFORMS, vol. 68(6), pages 4065-4089, June.
  • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:6:p:4065-4089
    DOI: 10.1287/mnsc.2021.4072
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    3. Kathleen Petrie Fuller & Qun Wu & Serhat Yildiz, 2024. "Corporate debt policy and tax uncertainty," Review of Quantitative Finance and Accounting, Springer, vol. 62(1), pages 247-270, January.

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