Do Financial Constraints Affect Future Tax Outcome Volatility

This study investigates the relation between corporate financial constraints and the variability of future tax outcomes. We expect and document that current constraints motivate firms to explore tax avoidance opportunities that introduce more volatile future tax outcomes. We also find that the positive relation between financial constraints and tax outcome variability is more pronounced in firms reducing cash tax payments. However, we find that the prominence of the corporate general counsel and the presence of debt-based executive compensation mitigate this relation. These findings are consistent with constrained firms being willing to generate cash tax savings at the expense of tax outcome predictability in the future but only when the costs of the additional variability do not affect potential legal costs and when the risk of executive compensation loss is lower.