Tax Policy Expectations and Investment: Evidence from the 2016 U.S. Election and Tax Cuts and Jobs Act
with Stephan Hollander, Martin Jacob, and Xiang Zheng | Revision requested | December 2021
We examine how tax policy expectations evolve around and shape firms’ investment response to a change in tax policy. Our study is motivated by Hennessy and Strebulaev (2020), who show analytically that bias arising from unmeasured policy expectations can confound inferences regarding the causal impact of a policy change on investment. Using a text-based approach to measuring firms’ tax policy expectations, we document that two recent tax-changing events—namely, the 2016 U.S. election and the Tax Cuts and Jobs Act (TCJA)—affected these expectations in ways that vary considerably across firms and sometimes contrary to often-used conventional assumptions (e.g., uncertainty over tax policy, on average, is found to increase after the election). As for the TCJA, we observe that these event-induced tax policy expectations materially shape investment both before and in response to its passage. Our findings support the idea that firm-level tax policy expectations can affect investment behavior around a change in tax policy, and suggest a methodology that researchers can use to incorporate these policy expectations into their analysis of tax policy.
with John Barrios | Revision requested | August 2021
We examine the extent to which the labor market facilitates the diffusion of tax planning knowledge across firms. Using a novel dataset of tax department employee movements between S&P 1500 firms, we find that firms experience an increase in their tax planning after hiring a tax employee from a tax aggressive firm. This finding is robust to various research designs and specifications. Consistent with tax planning knowledge driving this result, we find that the tax planning benefit of hiring an employee from a tax aggressive firm is stronger when the employee likely played a role in the prior firm’s successful tax planning, is more likely to have control over the hiring firm’s tax strategy, and when the hiring firm likely had less tax planning knowledge prior to the hire. Further tests suggest that tax planning knowledge is highly specific in nature: the increase in tax avoidance is larger when the hiring and former firms are similar (i.e., operating in the same sector or having similar foreign operations), and firms are more likely to hire tax department employees from firms with similar characteristics. Our study documents the first-order role of the labor market in the diffusion of tax planning knowledge across firms, and indicates that tax department human capital is a central determinant of tax planning outcomes.
with Stephan Hollander and Martin Jacob | June 2020
We use U.S. Securities and Exchange Commission (SEC) filings to provide initial large-sample evidence regarding utilization of corporate tax provisions by U.S. firms under the Coronavirus Aid, Relief, and Economic Security Act (CARES). These tax provisions were intended to provide firms immediate liquidity to prevent widespread bankruptcies and layoffs in response to the COVID-19 pandemic. However, critics have argued that the provisions were poorly targeted and amounted to “giveaways” for shareholders of large corporations. We find that 38 percent of firms discuss at least one of the CARES tax provisions in their SEC filings, a result primarily attributable to the net operating loss (NOL) carryback provision. Firms experiencing lower stock returns during the COVID-19 outbreak are more likely to discuss CARES tax provisions, but not firms in states or industry sectors exhibiting large increases in unemployment. Further, we find a higher likelihood of tax provision discussions for firms with pre-pandemic losses and higher financial leverage. Finally, we document some evidence that firms facing potential reputational or political costs from discussing these tax provisions may have avoided doing so. Our analyses suggest that tax provisions under CARES were not material for most publicly-traded U.S. firms, were not likelier to benefit firms in greater need of liquidity during the pandemic, and that some firms perceived that disclosing benefits would be costly. These findings are important for policymakers as they consider additional economic relief for U.S. corporations while the coronavirus pandemic lingers.