Speaker: WANG Zigan, Assistant Professor of bussiness school, the University of Hong Kong
Venue: Room 530, School of Economics, West Part of Zijingang Campus
Abstract:
We hypothesize and provide evidence that the effect of political connections on corporate taxation depends on firms' financial constraints. After an arguably exogenous increase in political connections arising from close congressional elections, financially unconstrained firms increase their tax planning, while constrained firms decrease it. The decrease (increase) in the tax planning of financially constrained (unconstrained) firms is more pronounced when the connected politicians serve on the banking-related (tax-related) committees. Constrained firms also experience a significant decrease in cost of capital and receive more government contracts after obtaining more political connections, supporting the idea that alleviating firms’ financial constraints is the mechanism through which political connections affect the tax planning of constrained firms. Collectively, our findings highlight the importance of financial constraints in understanding the tax planning of politically connected firms.