Real Effects of Tax Uncertainty: Evidence from Firm Capital Investments

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. This paper was accepted by Brian Bushee, accounting.

Foreign Employment, Income Shifting, and Tax Uncertainty

We examine the effect of foreign employment on two outcomes-income shifting and the tax uncertainty of foreign transactions. Using a hand-collected sample of employment disclosures, we partition our sample into firm-years with a higher or lower degree of foreign employment. Using two distinct income shifting models, we document that, on average, a high degree of foreign employment is associated with greater tax-motivated income shifting out of the U.S. We also posit and find that a high degree of foreign employment enhances the economic substance of foreign transactions, reducing the tax uncertainty associated with foreign income. We conduct additional analyses to mitigate selection bias concerns, and we use exogenous changes to the costs and benefits of income shifting using foreign employment to strengthen identification. Our results highlight firms' use of employees as part of a tax-efficient supply chain and how foreign employment enhances income shifting opportunities between jurisdictions.