ABSTRACT This study examines whether firm-specific tax policy uncertainty (TPU) influences corporate investment decisions. Investment theory predicts that, with uncertain project cash flows, firms should elect to delay committing to investments. Consistent with this prediction, we find that TPU is negatively associated with both tax planning and other investments, incremental to the firm’s nontax uncertainties. In exploring the consequences of greater TPU, we find TPU is associated with inefficient underinvestment, which negatively impacts future firm profitability. We further show that, during periods of unusually high TPU, when tax planning investments are especially more valuable, firms appear to substitute away from general investments toward tax planning. These findings suggest that firms prefer to direct resources toward engaging with tax experts for guidance when the tax environment is more uncertain. Overall, we find that tax policy uncertainty has a negative effect on corporate investments and future firm performance. Data Availability: All data are compiled from publicly available sources.
Lee et al. (Thu,) studied this question.