Discussion of “The interaction between incentive and opportunity in corporate tax planning: Evidence from financially constrained firms”

Abstract

The Interaction between Incentive and Opportunity in Corporate Tax Planning:Evidence from Financially Constrained Firms by Kaishu Wu (2024) examines the impact of tax planning opportunities (TPO) on the relation between tax avoidance incentives and tax avoidance. TPO is the key construct in the manuscript. It is estimated as the difference between a firm's average five-year (t-5 to t-1) actual cash effective tax rate (CETR) and its predicted five-year CETR. The predicted CETR is based on firm characteristics research has shown affect cash effective tax rates, such as size, return on assets, market-to-book, research and development, intangible assets, etc. The manuscript argues and provides evidence that the positive relation between tax avoidance incentives and tax avoidance, as shown in prior research, is significantly bigger for firms with larger TPOs.