Firm Tax Uncertainty, Cash Holdings, and the Timing of Large Investment

Abstract

This paper examines whether there is evidence that tax uncertainty affects key firm decisions, namely firm decisions regarding capital investments. We find that, on average, firms facing greater tax uncertainty are more likely to delay large capital investments and that the annual capital expenditures made by these firms are lower than that of firms facing less tax uncertainty. We use cross-sectional tests to address alternative explanations for our primary results, such as general firm risk, agency issues, and reverse causality. Overall, our results support an implicit empirical claim by Adam Smith, that tax uncertainty has policy-relevant, real economic consequences.