Tax Policy Uncertainty and Investment in Tax Planning: Firm-Level Evidence

ABSTRACT Using a large sample of U.S. firms between 2003 and 2019, this paper employs a novel firm-level measure of tax policy uncertainty from conference call transcripts and finds that investment in tax planning is significantly lower when perceived tax policy uncertainty is higher. Cross-sectional analyses show that this negative relationship is mitigated by expected future profitability and managerial ability. Further analyses reveal several tax and nontax shareholder consequences of tax policy uncertainty, including lower tax planning effectiveness, higher tax risk, more cash holding, and lower firm value. Overall, our study contributes to the literature by showing how cross-sectionally heterogeneous tax policy uncertainty affects corporate tax decisions. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: D81; E65; G18; H25; M41; M42.