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Mitigating Unexpected Financial Constraints

Bauer Researcher Looks at Impact of Unexpected Financial Constraints for Companies

Published on April 20, 2021

Photo: Bin Li

Many companies have experienced financial constraints in the wake of the pandemic, but it’s not unusual for occasional shortfalls to impact carefully planned budgets, even in relatively stable times. A new study from the C. T. Bauer College of Business examines how some companies use aggressive tax planning to mitigate the impact of unexpected financial constraints.

Assistant Professor Bin Li, of Bauer’s Department of Accountancy & Taxation, is one of the authors of “Do Financing Constraints Lead to Incremental Tax Planning? Evidence from the Pension Protection Act of 2006,” (Campbell, J., Goldman, N., Li, B.), recently accepted for publication in Contemporary Accounting Research, a top accounting journal.

The researchers looked at data from more than 2,000 companies before and after implementation of the 2006 Pension Protection Act (PPA), which had a huge impact on companies that offer defined-benefit pension plans. While previously required to fund approximately 90 percent of their plans over a 30-year period, the companies with pension plans now were required to provide 100 percent funding over seven years. The change created a rare opportunity for researchers.

“We used this as a setting to test how a sudden increase in financial constraints affects the tax strategies of a company,” Li said.

In the face of that sudden financial constraint, the researchers found that impacted firms were able to recoup 19 percent of their investment shortfall by modifying tax strategies.

“For affected firms, their effective tax rate decreases by about 2 percent after the shock. That’s a pretty big effect,” Li said.

“We found that if they are able to save some money using more aggressive tax strategies, they will be able to recoup some of the investments that would otherwise be abandoned. We also found that the impact varies with the firm’s pre-financial condition. If their pension plans were more underfunded, they’re more likely to use more aggressive tax strategies.”

The researchers document some of those strategies in the paper and conclude that those strategies are an integral part of overall business strategy.

Li’s primary research concerns whether and why accounting disclosures, both mandatory and voluntary, affect investor decisions and firm value. He is also interested in research topics related to corporate finance, regulatory enforcement and standard setting. His research has been published in top accounting and finance journals and has received multiple awards, such as the Notable Contributions to Accounting Literature Award and the Financial and Accounting Reporting Section (FARS) Best Paper Award.