Tax planning and financial default: role of corporate life cycle

Abstract

PurposeDrawing on the resource-based view (RBV), this study investigates how tax planning affects the likelihood of financial default in different stages of the corporate life cycle.Design/methodology/approachCollecting a large sample of US firms between 1989 and 2016, hypotheses are tested using a hazard model. Several robustness and endogeneity checks corroborate the main findings.FindingsThe results show that tax-planning firms are less likely to default in the introduction and decline stages, while they are more likely to default in the growth and maturity stages. The findings suggest that introductory and declining firms use cash resources obtained from tax planning efficiently to meet their needs and acquire other useful resources. In growing and mature firms, tax aggressiveness generates unnecessary slack resources, weakens managerial discipline and increases reputational risks.Practical implicationsThe results shed light on the benefits and costs associated with tax planning throughout firms' life cycle, holding great significance for managers, investors, lenders and other stakeholders.Originality/valueThis study contributes to the literature that examines resource management at different life cycle stages by showing that cash resources from tax planning are managed in distinctive ways in each life cycle stage, having a varied impact on the likelihood of default. The authors shed light on underexplored cash resources. Furthermore, this study shows the potential linkages between the agency theory and RBV.