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Tax planning and financial default: Tax planning

and financial
role of corporate life cycle default
Alessandro Gabrielli and Giulio Greco
Department of Economics and Management, University of Pisa, Pisa, Italy
321
Abstract
Received 23 August 2022
Purpose – Drawing on the resource-based view (RBV), this study investigates how tax planning affects the Revised 8 March 2023
likelihood of financial default in different stages of the corporate life cycle. 7 June 2023
Design/methodology/approach – Collecting a large sample of US firms between 1989 and 2016, hypotheses 4 September 2023
are tested using a hazard model. Several robustness and endogeneity checks corroborate the main findings. Accepted 18 September 2023
Findings – The 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 implications – The 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/value – This 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.
Keywords Tax planning, Corporate life cycle, Financial default, Resource management
Paper type Research paper

1. Introduction
Tax planning [1] is a key managerial activity with relevant implications for firms’ growth,
internationalization, corporate value and capital structure (Cooper and Nguyen, 2020; Wang
et al., 2020). The resource-based view (RBV) posits that tax planning is an important cash-
generating activity (Hasan et al., 2017; Medioli et al., 2020; Magerakis, 2022). Studies suggest
that, although not inimitable, cash is one of the most desirable resources for value creation
because it is flexible, readily convertible and can be used to acquire strategic resources (Lee
and Wu, 2016; Warnier et al., 2013). Its scarcity hinders firms from not only acquiring other
resources but also managing existing resources, increasing the risk of default (Trahms et al.,
2013). Other researchers assert that tax planning is a value-destroying activity because it
generates slack cash resources, diminishing the managerial discipline over efficient investing

© Alessandro Gabrielli and Giulio Greco. Published by Emerald Publishing Limited. This article is
published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce,
distribute, translate and create derivative works of this article (for both commercial and non-commercial
purposes), subject to full attribution to the original publication and authors. The full terms of this licence
may be seen at http://creativecommons.org/licences/by/4.0/legalcode
This research was partially carried out when Alessandro Gabrielli was a Visiting Ph.D. Student at
the WHU– Otto Beishem School of Management in Vallendar, Germany. The authors are grateful to the
members of the WHU– Otto Beishem School of Management Brown Bag and Tax Readings Group and
to the participants of the SIDREA–EAA Workshop jointly held by the Italian Society of Accounting
and Business Economics Educators and the European Accounting Association, as well as to the
participants of EAA 2022 Annual Congress and the Ninth International Conference of JIAR. The authors Management Decision
Vol. 61 No. 13, 2023
are also thankful to Martin Jacob, Lisa Hillmann, Petra Andries, and Marco Maria Mattei for providing pp. 321-355
helpful comments. Alessandro Gabrielli gratefully acknowledges financial support from the Department Emerald Publishing Limited
0025-1747
of Economics and Management at the University of Pisa. DOI 10.1108/MD-07-2022-0928
MD and usage of resources and increasing reputational risks (Daniel et al., 2004; Lee and Wu,
61,13 2016; Nohria and Gulati, 1996).
RBV scholars suggest exploring how a firm obtains and manages resources throughout
its life cycle (Sirmon et al., 2011; Trahms et al., 2013; Zahra, 2021). Tax planning is likely
heterogeneous across a firm’s life cycle. Notably, the life cycle affects firms’ ex ante (pretax
planning) resources, their propensity to engage in tax planning (Hasan et al., 2017) and how
they allocate and use resources generated from tax planning (Cooper and Nguyen, 2020;
322 Dickinson, 2011). Hence, whether tax planning increases or decreases the likelihood of
financial default likely depends on the tax-planning firm’s life cycle stage. Therefore, this
study investigates how tax planning influences the likelihood of financial default when
moderated by the firm’s life cycle stage.
This research is important for two reasons. First, it answers recent calls for research on
resource management at different life cycle stages (Zahra, 2021), as well as on firm
characteristics and outcomes of tax planning (Wang et al., 2020). Second, academics and
practitioners are interested in understanding how tax planning affects the likelihood of
financial default in those life cycle stages where access to resources is constrained, such as the
introduction and decline stages (Zahra, 2021).
Using a large sample of US public firms in the period 1989–2016, the research regresses
tax planning, measured by effective tax rates (ETRs) and ETRs volatility, on a financial
default-dependent variable. Following prior studies (Altman, 1968; Beaver et al., 2010), we
define financial default as the firms filing under either Chapter 11 or Chapter 7 procedures.
Our moderator variable is the corporate life cycle. Following prior management literature, we
operationalize life cycle using the Dickinson cash flow patterns model (Cuypers et al., 2016;
S
anchez et al., 2017; Hasan and Cheung, 2018; Hsu, 2018). The research adds a set of control
variables—identified in prior literature on financial default—and year and industry fixed
effects. Our study also performs a battery of tests to address potential endogeneity concerns
related to reverse causality and omitted variable bias (Wooldridge, 2010).
The findings show that the association between tax planning and financial default varies
at different life cycle stages. We find that aggressive tax planner firms (i.e. firms with lower
ETRs) are less likely to default in the introductory and decline life cycle stages. The results
are economically significant. Using hazard ratios, we find that a 1% reduction of ETRs
lowers—ceteris paribus—the probability of a default of 6.65% and 3.51% for firms in the
decline and introductory stages of the corporate life cycle, respectively. These findings
suggest that firms in the introductory and decline stages efficiently use cash resources from
tax planning to meet their financial needs and acquire resources useful for their survival.
Aggressive tax planning, however, leads to a higher default likelihood among firms in the
growth and mature stages—a 1% increase in the ETRs volatility increases the default
likelihood by 1.92% in growth firms and by 2.36% in mature firms. Volatile tax rates, which
are visible to external stakeholders through financial reports, may signal generation of
unnecessary slack resources, lack of managerial discipline and increased reputational risks
(Duong et al., 2022).
This study contributes to literature in several ways. First, as stated earlier, it answers the
call for research on resource management at specific life cycle stages (Zahra, 2021). Our
findings show that cash resources from tax planning are managed and allocated in distinctive
ways across life cycle stages, thereby having a varied impact on the default likelihood.
Moreover, while most prior studies focus on valuable, rare, inimitable and organizationally
embedded (VRIO) resources, we contribute to the literature on less explored cash resources
(Warnier et al., 2013; Magerakis, 2022).
Second, this study contributes to prior RBV literature with insights on potential linkages
between agency theory and RBV, at a conceptual and empirical level (Biscotti et al., 2018;
Zona et al., 2018; Purkayastha et al., 2021; Luu, 2023). This study shows that cash slack from
aggressive tax planning increases agency costs and weakens the optimal management of the Tax planning
firm’s resources at certain life cycle stages. In this sense, RBV and agency theory may be and financial
complementary in explaining why tax planning increases the default risk in growth and
mature firms, thus offering a more refined explanation of the phenomenon.
default
Third, this study extends the literature on tax planning. It shows that firms’ life cycle
stages explain not only the heterogeneity of approaches to tax planning (Hasan et al., 2017;
Wang et al., 2020; Cooper and Nguyen, 2020) but also the outcome of such activities.
Compared to Hasan et al.’s (2017) findings, our findings indicate that a firm’s life cycle stage 323
must be considered to not only understand why certain firms are more tax aggressive than
others, but also gain insight into why only certain firms seem to benefit from tax planning.
Fourth, this study contributes to the literature on how life cycle-specific management
decisions affect the likelihood of default. Previous studies have shown that a firm’s life cycle
stage moderates the relationship between the likelihood of default and several management
decisions—such as investment, R&D and CSR (Al-Hadi et al., 2019; Anandarajan et al., 2010;
Koh et al., 2015). This study extends our current understanding of this aspect by exploring the
moderating role of firms’ life cycle stages in the relationship between default likelihood and
tax planning. In this sense, it has the potential to complement the recent literature on firm’s
failure and survival under specific conditions (Islam and Fatema, 2023; Paeleman et al., 2023)
and in specific life cycle stages (Mota et al., 2022; Ehsani and Osiyevskyy, 2023).
The findings present several managerial implications. The research informs managers
and stakeholders on the costs and benefits of tax planning across a firm’s life cycle stages as
well as the stakeholders’ assessment of tax planning. At certain life cycle stages, tax planning
acts as a signal to outsiders for increased managerial discretion and reputational risks
(Duong et al., 2022), thus affecting the default likelihood. In this respect, we provide a
quantitative estimate of the magnitude of the tax planning effect on financial default
likelihood, which is of interest to managers and stakeholders.
The remainder of the paper is structured as follows. Section 2 reviews the relevant
literature and develops hypotheses. Section 3 describes the research methodology. Section 4
presents the results. Section 5 critically discusses the research results, highlighting their
implications to theory and management practice. Section 6 concludes the paper.

2. Literature review and hypotheses development

2.1 Literature review
The RBV suggests that firms are “a collection of productive resources, where the choice of
different uses of these resources over time is determined by administrative decision”
(Penrose, 1959, p. 21). Numerous RBV-based empirical studies have examined how firms’
resource management [2] impacts their survival and performance (Anders
en, 2011; Barney,
1991; Newbert, 2007; Warnier et al., 2013; Wernerfelt, 1984) [3]. Drawing on the RBV,
researchers have integrated the concept of the corporate life cycle into the analysis of firms’
resources (Sirmon et al., 2011). The management literature identifies five distinct phases in the
corporate life cycle: introduction, growth, maturity, shake-out and decline (Miller and Friesen,
1984). These stages are characterized by differences in the business environment, resource
availability, strategy and decision-making (Miller and Friesen, 1984).
Recent studies indicate that different life cycle stages are associated with different
resource management and commitment choices and significant changes in resource
endowment (Sirmon et al., 2011; Trahms et al., 2013; Zahra, 2021) [4]. Some studies have
demonstrated different resource management in different life cycle stages, focusing on
default avoidance. For example, Koh et al. (2015) showed that firms in the introduction stage
change their CEOs more quickly and reduce dividend payouts to avoid bankruptcy. With
lower or less appealing investment opportunities, mature firms engage in corporate social
MD responsibility to attract resources and reduce their risk of default (Al-Hadi et al., 2019).
61,13 Declining firms attempt to avoid or delay financial defaults by boosting internal efficiency
and gaining support from key stakeholders (Anandarajan et al., 2010; Morrow et al., 2007;
Trahms et al., 2013).
This study focuses on a notable managerial decision, tax planning and its effect on the
likelihood of default. Efficient tax planning reduces financial “scarce resources” that are
transferred outside the firm and increases firm performance (Watson, 2015). In managerial
324 decision-making, tax planning is likely a wider evaluation of a firm’s economic fundamentals,
cash flow patterns and internal resource assessment (Scholes et al., 2014; Xu and Zheng,
2020). Hasan et al. (2017) show that firms’ propensity to engage in tax planning varies based
on their life cycle stage; introductory and declining firms are, on average, more active than
growing and mature firms. However, whether tax planning increases or reduces the
likelihood of default based on the life cycle stage remains unexplored.
Prima facie, tax planning is a salient cash-generating activity that limits the transfer of
financial resources from the firm to the government and generates high discretion slack [5]
(George, 2005). The life cycle stage affects two key conditions underlying firms’ tax planning
decision: the ex ante availability of resources (and the related) financial needs, and the
managers’ commitment or discretion regarding using corporate resources (Dickinson, 2011;
Sirmon et al., 2011).

2.2 Hypotheses development

In the introduction stage, firms generally have negative operating cash flows. Some do not
even break-even and need resources for investments (Dickinson, 2011; Maiti et al., 2020; Song
et al., 2022; Franczak et al., 2023). Since they are run by owner-entrepreneurs, these firms
usually have centralized organizational structures (Miller and Friesen, 1984; Franczak et al.,
2023) and limited separation between ownership and control (Badertscher et al., 2013; Fama
and Jensen, 1983). Resource constraints and limited access to external financing sources
increase their propensity to obtain additional resources through tax planning (Edwards et al.,
2016; Higgins et al., 2015; Cerrato et al., 2023). They seek and use legal tax minimization
opportunities, including benign deferral tax strategies and tax loss deductions, that are
unlikely to be challenged by tax authorities (Hasan et al., 2017).
By using resources shrewdly and having little or no managerial discretion (Miller and
Friesen, 1984; Sirmon et al., 2011), cash resources generated through tax planning likely foster
firms’ competitive advantage and performance, reducing the risk of financial default. Owing
to their small size and low exposure to capital markets, reputational costs associated with tax
planning are limited for these firms (Al-Hadi et al., 2016; Zimmerman, 1983). Hence, in the
introduction stage, tax planning likely provides firms with an additional source of cash
resources and is negatively associated with their financial default. Thus, we formulate the
following hypothesis.
H1. Tax planning is negatively associated with the financial default of firms in the
introductory stage of their life cycle.
In the growth stage, firms have robust operating cash flows, raise cash from equity and/or
leverage financing to fund investments. Tax planning is less appealing as a source of
generating cash (Hasan et al., 2017). At this stage, there is a greater degree of separation
between ownership and control with decentralization and functionalization (Filatotchev et al.,
2006; Miller and Friesen, 1984). Furthermore, slack resources generated through tax planning
can diminish managerial discipline over efficient investment (Nohria and Gulati, 1996).
Managers may exploit their discretion and use slack resources to continue projects having
negative present value, make suboptimal investments, or take up excessively costly and
risky R&D activities (George, 2005; Lee and Wu, 2016; Nohria and Gulati, 1996). Shareholders Tax planning
are likely to perceive tax planning activities as risky and a sign of managerial wealth and financial
diversion, penalizing firms with a higher cost of capital (Desai et al., 2007; Duong et al., 2022).
Lenders also penalize high-tax-planning firms with a high cost of debt (Dhawan et al., 2020).
default
Based on these arguments, we posit the following hypothesis.
H2. Tax planning is positively associated with the financial default of firms in the growth
stage of their life cycle. 325
Once firms exhaust all growth opportunities, they mature. Mature firms are older, larger,
known in the market, and investors and lenders perceive them as less risky (Easley and
O’Hara, 2004; Miller and Friesen, 1984). These firms have abundant operating cash flow
owing to reduced investment needs and negative cash flow from financing activities due to
debt repayment and cash dividend payouts (Dickinson, 2011; Faff et al., 2016). Resource slack
and complex bureaucratic structures can increase managerial discretion in how funds
obtained from tax planning are employed (Quinn and Cameron, 1983; Nohria and Gulati,
1996; Carnes et al., 2017). Considering high resource availability, poor investment
opportunities and high managerial discretion, tax planning likely becomes ancillary to
managerial wealth extraction and/or limited benefit to shareholders and bondholders. For
mature firms, as Flanagan and O’Shaughnessy (2005, p. 445) noted, “reputation is perhaps
one of its most important strategic resources,” and they focus on reinforcing their relationship
with the external environment (Boyd et al., 2010; Jacob et al., 2021; Zimmerman, 1983).
Meanwhile, aggressive tax planning can raise doubts from the government and tax
authorities (Gallemore et al., 2014). Customers may also be unwilling to support aggressive
tax-planning companies (Hardeck and Hertl, 2014). Moreover, investors and lenders do not
expect tax avoidance from mature and risk-averse firms and can react adversely to such tax
planning activities by increasing the cost of capital and debt (Hasan et al., 2017). Concerns
regarding reputational costs and penalties may outweigh the expected economic benefits
from tax planning. Thus, we posit the following hypothesis.
H3. Tax planning is positively associated with the financial default of firms in the
maturity stage of their life cycle.
The corporate life cycle ends in the decline stage. When firms enter this stage, growth rates,
operating cash flows and investment expenditures plummet (Hasan et al., 2017). They divest
and engage in asset restructuring activities (e.g. sale of assets) to pay off debt, renegotiate
interest rates and continue operating (Dickinson, 2011; Koh et al., 2015). The lack of resources
and close monitoring by shareholders and external lenders substantially reduce managerial
discretion over resource usage (Dickinson, 2011; Jensen, 1986). Then, tax planning can be a
valuable source of cash and business restructuring to avoid bankruptcy. In declining firms,
the benefits of survival overcome the risks of tax avoidance for both managers and
shareholders (i.e. litigation, penalty and reputational risks) (Hasan et al., 2017; Koh et al., 2015;
Morrow et al., 2007; Richardson et al., 2015). Based on these arguments, we formulate the
following hypothesis.
H4. Tax planning is negatively associated with the financial default of firms in the
decline stage of their life cycle.

3. Method
3.1 Sample
We collected data from the Compustat North America database. We downloaded financial
statement data of both active and inactive US firms. Then, we merged it with bankruptcy
MD information gathered from the CRSP, which provides information about the reasons for a
61,13 firm’s delisting (delisting codes: 400 “Liquidation” and 574 “Bankruptcy”). Initially, our
sample comprised 283,633 firm-year observations pertaining to the period between 1989 and
2016. After excluding observations with incomplete data, the final sample had 90,790 firm-
year observations. Our sample period starts in 1989 because Compustat provides cash flow
data of all firms starting from this year (Dickinson, 2011). The sample period ends in 2016
because former President Donald Trump enacted a major change in the US tax system, and
326 the implementation of the Tax Cuts and Jobs Act began in 2016. Since variation in the
statutory tax rate may affect both dependent and independent variables, we limited our
analysis to investigating a period that was not substantially affected by tax rate variations at
the federal level.

3.2 Research design

We used two estimation approaches to test our hypotheses: a hazard model and a logit model.
First, we use a hazard model. Scholars suggest that it is an appropriate estimation strategy
for analyzing firms’ financial default because it can incorporate time-variant features of
model covariates (Bandopadhyaya, 1994; Shumway, 2001). Since financial default is dynamic
in nature, the hazard model can provide a robust estimation of the probability that a firm will
default at a given point in time (Esteve-P
erez and Ma~ nez-Castillejo, 2008; Shumway, 2001).
Next, we use the logit model as a robustness test. The logit model is a standard approach in
examining financial defaults (Altman et al., 2019; Campbell et al., 2008). Following Hasan et al.
(2017), we estimate our model (Equation 1) using two approaches: (a) a pooled regression on
the full sample and (b) a separate regression on the subsample of firms in each life cycle stage.
Default it ¼β0 þ β1 ðTax PlanningÞi;t−1 þ β2 ðIntroductionÞi;t þ β3 ðTax PlanningÞi;t−1 xðIntroductionÞi;t þ
β2 ðGrowthÞi;t þ β3 ðTax PlanningÞi;t−1 xðGrowthÞi;t þ β4 ðMatureÞi;t þ
β5 ðTax PlanningÞi;t−1 xðMatureÞi;t þ β6 ðDeclineÞi;t þβ6 ðTax PlanningÞi;t−1 xðDeclineÞi;t þ
β7 ðWC TAÞi;t−1þβ8 ðRE TAÞi;t−1þβ9 ðEBIT TAÞi;t−1 þβ10 ðMV TLÞi;t−1þβ11 ðS TAÞi;t−1þ
X n
Year FixedEffects – Industry FixedEffects þ εi;t
t¼0

(1)

Default it is the measure of financial default. It is a binary variable that equals one for each
firm-year observation of a firm filed under Chapters 11 or 7. Otherwise, it equals zero.
Following previous research, we measured financial default as the firm’s decision to start the
legal procedure of Chapters 11 or 7 (K€ ucher et al., 2020; Lussier, 1995) [6]. Tax Planning i;t−1 is
the independent variable. Following previous research, we measure tax planning using
ETRs. Specifically, we use GAAP ETR as the first proxy, calculated as income tax expense
(txt) on pretax income (pi). In addition to GAAP ETR, we use a long-term five-year standard
deviation of ETRs (GAAP ETRVol). The GAAP ETRVol captures the risk inherent in
corporate tax positions (Drake et al., 2019; Guenther et al., 2017). Blouin (2014) argues that
combining these two proxies can provide a true and complete picture of corporate tax
planning and the level of its aggressiveness. We also ensure that tax volatility is related to tax
planning and not driven by the firm’s pretax performance volatility by controlling for the
firm’s performance in the base models and endogeneity checks.
The corporate life cycle is the moderator variable. Lifecyclei;t is a dummy variable that
identifies the life cycle stage when the firm defaults. Following previous studies (Hasan et al.,
2017; Koh et al., 2015), we proxied corporate life cycle stages using firms’ cash flow patterns,
similar to Dickinson’s model (2011). Dickinson (2011) argues that a firm’s progression from
one life cycle stage to another is not a function of its age but of its cash flow patterns. Cash Tax planning
flow patterns have a robust relationship with life cycle fundamentals and explain why not all and financial
firms progress in the same order despite their age (Dickinson, 2011; Josefy et al., 2017) We
adopt the Dickinson model because it provides a less erroneous identification of the corporate
default
life cycle with respect to other classification criteria that are free from distributional
assumptions (Hsu, 2018). Although alternative identification strategies exist (e.g. Anthony
and Ramesh, 1992), it is a common stand in the literature that they are less effective or more
erroneous than the Dickinson model (Habib and Hasan, 2019). According to the recent 327
literature on the corporate life cycle, firms’ transition from one stage to another cannot be
fully explained by the age or the dynamics of their retained earnings (Dickinson, 2011; Yang
et al., 2021). Therefore, a classification based on cash flow patterns can provide a consolidated
and theoretically consistent criterion, limiting the researcher’s arbitrariness in their
identification (i.e. distributional assumption bias) (Dickinson, 2011). Several studies in
management, accounting and organization science have used (or built on) Dickinson’s model
to identify life cycle stages (e.g. Cuypers et al., 2016; Hasan and Cheung, 2018; Hsu, 2018;
S
anchez et al., 2017). To ensure the robustness of our results, in all of our models, we also
control for the level of retained earnings in total assets (RE_TA), a well-established measure
in the financial default literature (Altman et al., 2019) and used by DeAngelo et al. (2006) as a
proxy for the life cycle stage.
Following Dickinson (2011), we define corporate life cycle stages as follows:
Introduction: if OANCF < 0, INVCF < 0 and FINCF > 0,
Growth: if OANCF > 0, IVNCF < 0 and FINCF > 0,
Maturity: if OANCF > 0, INVCF < 0 and FINCF < 0,
Decline: if OANCF<0, INVCF>0 and FINCF ≤ or 5 > 0 and
Shake-out: the remaining firm-years (those that are not classified as introduction, growth,
maturity, or decline) [7].
Given its residual nature, previous studies have not considered the shake-out stage in their
analyses or included it only as a benchmark (Hasan et al., 2017; Koh et al., 2015). Accordingly,
we did not consider this stage in our analyses.
As control variables, we include these financial ratios based on the literature on financial
defaults (Altman et al., 2019; Altman, 1968): working capital/total assets (“WC_TA”), retained
earnings/total assets (“RE_TA”), earnings before interest and taxes/total assets (“EBIT_
TA”), market value of equity/total liabilities (“MV_TL”) and sales/total assets (“S_TA”). WC_
TA denotes the level of net liquid assets in the total capital invested and is a measure of
corporate liquidity. RE_TA represents cumulative profitability implicitly related to a firm’s
age (DeAngelo et al., 2006). On average, the RE_TA ratio increases as the firm ages. EBIT_
TA represents firms’ profitability. It specifically reflects the part of corporate profitability
that arises from firms’ productivity, net of any leverage or tax effect. It is important to control
for it because it permits us to parse out the effect of tax avoidance on financial default while
limiting the risk that negative corporate performance could affect the interpretation of our
results. MV_TL is a measure of market performance calculated as the sum of the market
value of common and ordinary shares divided by the total liabilities. Finally, the S_TA (asset-
turnover ratio) measures the total assets that contribute to the firm’s sales-generating
activities (Altman, 1968). All the models include industry and year fixed effects and standard
errors clustered by firms, which control for firm-level fixed effects (Petersen, 2009).
We use lagged independent and control variables. Using lagged dependent variables can
help mitigate endogeneity concerns regarding reverse causality (Vergara, 2010), providing a
MD more conservative examination of the potential endogeneity bias. All the variables were
61,13 winsorized at 1%.

4. Results
4.1 Descriptive statistics
Table 1 displays the descriptive statistics of all variables with Default as the dependent
328 variable. There are 2,121 defaulted observations, 2.3% of the total firm-year observations.
The non-defaulted observations amount to 88,669, accounting for 97.6% of the total firm-year
observations.
Our explanatory variable is tax planning, proxied by GAAP ETR and GAAP ETRVol.
The mean GAAP ETR is 0.332 (33.2%), 0.336 (33.6%) and 0.331 (33.1%) for the total,
defaulted and non-defaulted samples, respectively. The mean GAAP ETRVol is 0.048 (4.8%),
0.053 (5.3%) and 0.047 (4.7%) for the total, defaulted and non-defaulted samples, respectively.
The t-statistics show that the mean-in-difference of tax-planning proxies in the defaulted and
non-defaulted samples is highly significant.
Descriptive statistics of control variables suggest that, on average, firms filing under
Chapters 7 or 11 have a low RE_TA, EBIT_TA and MV_TL and a high WC_TA and S_TA.
For the total, defaulted and non-defaulted samples, the mean of WC_TA is 0.244 (24.4%),
0.273 (27.3%) and 0.240 (24.0%), respectively. The mean of RE_TA in the total, defaulted and
non-defaulted samples is 0.146 (14.6%), 0.101 (10.1%) and 0.153 (15.3%), respectively. The
mean of EBIT_TA in the total, defaulted and non-defaulted samples is 0.100 (10.0%), 0.089
(8.9%) and 0.102 (10.2%), respectively. The mean of MV_TL is 3.477 (347.7%), 3.530 (353.0%)
and 3.091 (309.1%) in the total, non-defaulted and defaulted samples, respectively. Finally, the
mean of S_TA is 1.113 (111.3%), 1.096 (109.6%) and 1.235 (123.5%) in the whole, non-
defaulted and defaulted samples, respectively. The t-statistics indicate that the mean-in-
difference of all control variables in the defaulted and non-defaulted samples is statistically
significant.

4.2 Univariate analysis

Table 2 shows the Spearman’s correlation coefficients. Univariate analysis shows that GAAP
ETR and GAAP ETRVol are positively and highly associated with Default. Additionally,
Default is highly correlated with all life cycle stages, except for the growth and shake-out
stages, at the <0.01 significance level. More specifically, Default is highly and positively
correlated with the introduction and decline stages but highly and negatively correlated with
the maturity phase. Furthermore, all control variables are significantly associated with
Default in the expected direction.

4.3 Main results

Table 3 reports the results of employing the hazard model. For the sake of brevity, Table 3
reports only the coefficients of tax planning and the interaction term of tax planning and life
cycle. Across all models in Table 3, the control variables are significantly associated with
Default in the expected direction (not shown).
Column 1 in Table 3 shows that GAAP ETR is significantly and negatively associated
with Default. This finding suggests that tax planning results in more default since lower tax
rates imply a greater likelihood of default. Column 2 shows that GAAP ETRVol is positively
associated with Default. These findings support the notion that tax planning is associated
with more default when firm’s profitability, size, leverage, liquidity and retained earnings are
controlled for. They are consistent with the findings of previous studies (e.g. Dhawan et al.,
2020; Noga and Schnader, 2013). Columns 3 and 4 add the dummies of life cycle stages (not
Summary statistics
Non-defaulted firms Defaulted firms Total
(n 5 88,669) (n 5 2,121) Mean-in-Diff (N 5 90,790)
t-
Mean Median p25 p75 SD Mean Median p25 p75 SD Diff statistics Mean Median p25 p75 SD
***
GAAP ETRi,t 0.331 0.356 0.283 0.393 0.094 0.336 0.367 0.279 0.404 0.102 0.00423 (3.94) 0.332 0.357 0.283 0.395 0.095
GAAP 0.047 0.031 0.013 0.066 0.046 0.053 0.036 0.014 0.079 0.052 0.00570*** (12.52) 0.048 0.032 0.013 0.068 0.047
ETRVoli,(t,t-4)
WC_TAi,t 0.240 0.219 0.065 0.398 0.210 0.273 0.265 0.107 0.441 0.214 0.0102*** (5.10) 0.244 0.224 0.069 0.404 0.211
RE_TAi,t 0.153 0.222 0.072 0.406 0.392 0.101 0.153 0.036 0.319 0.388 0.115*** (25.18) 0.146 0.212 0.066 0.397 0.392
***
EBIT_TAi,t 0.102 0.101 0.067 0.149 0.049 0.089 0.087 0.053 0.132 0.056 0.0472 (57.09) 0.100 0.100 0.065 0.147 0.050
MV_TLi,t 3.530 1.863 0.837 4.632 3.713 3.091 1.609 0.826 3.710 3.499 0.637*** (19.02) 3.477 1.826 0.837 4.531 3.690
S_TAi,t 1.096 1.014 0.636 1.514 0.569 1.235 1.193 0.760 1.763 0.587 0.138*** (25.75) 1.113 1.034 0.649 1.547 0.573
Note(s): This table reports descriptive statistics for all the main variables included in our analyses during the period 1989–2016. The table also includes mean-in-differences and
t-statistics of the independent and control variables used
Source(s): Created by authors
Tax planning

329
default

Table 1.
and financial

Descriptive statistics
 MD

330
61,13

Table 2.
Correlation coefficients
Spearman correlation matrix
Life cycle Tax avoidance Control variables
GAAP GAAP WC_ RE_ EBIT_ S_
Covariates Defaulti,t Introduction Growth Mature Shake-out Decline ETRi,t ETRVoli,(t,t-4) TAi,t TAi,t TAi,t MV_TLi,t TAi,t

Defaulti,t 1
Life cycle
Introduction 0.142*** 1
Growth 0.00158 0.174*** 1
Mature 0.0733*** 0.233*** 0.705*** 1
Shake-out 0.00367 0.00236 0.00714 0.00953* 1
Decline 0.0397*** 0.0287*** 0.0868*** 0.116*** 0.00117 1
Tax avoidance
GAAP ETRi,t 0.0146*** 0.0185*** 0.0182*** 0.00804* 0.000761 0.0174*** 1
GAAP 0.0456*** 0.0380*** 0.00940* 0.0641*** 0.00817* 0.0474*** 0.114*** 1
ETRVoli,(t,t-4)
Control variables
WC_TAi,t 0.0516*** 0.133*** 0.0290*** 0.0910*** 0.00182 0.0584*** 0.0440*** 0.0123*** 1
RE_TAi,t 0.0433*** 0.0475*** 0.0189*** 0.0895*** 0.0271*** 0.0701*** 0.122*** 0.186*** 0.0799*** 1
EBIT_TAi,t 0.0869*** 0.0819*** 0.0378*** 0.163*** 0.00822* 0.164*** 0.0637*** 0.190*** 0.128*** 0.172*** 1
MV_TLi,t 0.0391*** 0.00435 0.0815*** 0.0938*** 0.00474 0.00299 0.0464*** 0.0195*** 0.531*** 0.0463*** 0.272*** 1
S_TAi,t 0.0799*** 0.0974*** 0.132*** 0.108*** 0.0157*** 0.0112** 0.173*** 0.0783*** 0.215*** 0.00947* 0.249*** 0.0333*** 1
Note(s): This table reports the Spearman correlations between the main variables included in the analyses, namely: Default; GAAP ETRi,t, GAAP ETRVoli,(t,t-4), Introduction, Growth, Mature,
Shake-out, Decline, Working capital on total assets, Retained earnings on total assets, Earnings before interest and taxes on total assets, Market value of equity on total liabilities, Sales on total
assets. ***, **, * represent statistical significance at the 1%, 5 and 10% level, respectively
Source(s): Created by authors
 Default
Pred. Sign (1) (2) (3) (4) (5) (6)

Tax avoidance as GAAP ETR

GAAP ETRi,t-1 () 0.679*** 0.605*** 0.551*
(0.187) (0.186) (0.330)

Tax avoidance as GAAP ETR volatility

GAAP ETRVoli,(t-1,t-5) (þ) 2.685*** 2.347*** 1.340**
(0.311) (0.310) (0.593)

Life cycle 3 Tax avoidance

Introduction 3 GAAP ETRi,t-1 (þ) 0.705*
(0.408)
Growth 3 GAAP ETRi,t-1 () 0.425
(0.380)
Mature 3 GAAP ETRi,t-1 () 0.487
(0.389)
Decline 3 GAAP ETRi,t-1 (þ) 1.344**
(0.548)

Life cycle 3 Tax avoidance

Introduction 3 GAAP ETRVoli,(t-1,t-5) () 0.5111
(0.720)
Growth 3 GAAP ETRVoli,(t-1,t-5) (þ) 1.996***
(0.686)
Mature 3 GAAP ETRVoli,(t-1,t-5) (þ) 2.200***
(0.662)
Decline 3 GAAP ETRVoli,(t-1,t-5) () 0.613
(0.851)
Observations 90,790 90,790 90,790 90,790 90,790 90,790
Life cycle dummies NO NO YES YES YES YES
Model controls YES YES YES YES YES YES
Year fixed effects YES YES YES YES YES YES
Industry fixed effects YES YES YES YES YES YES
Standard errors clustered by FIRM FIRM FIRM FIRM FIRM FIRM
Note(s): This table reports the estimated coefficients obtained by regressing the hazard model with a dependent binary variable (“Default”) identifying firms entering Chapter 11 (restructuring) or Chapter 7
(liquidation) at time t. Columns 1, 3 and 5 report the results obtained by including a 1-year lagged GAAP ETR variable, calculated by taking the total income tax expense at time t-1 on the pre-tax accounting
income at time t-1 (Hanlon and Heitzman, 2010). The higher the GAAP ETR is, the lower the level of tax avoidance is. Columns 2, 4 and 6 report the results obtained by using a 1-year lagged GAAP ETRVol
variable, calculated as the standard deviation of GAAP ETR from time t-1 to time t-5. The higher the GAAP ETRVol is, the higher the level of risk associated to the firm’s tax position is. Columns 1 and 2 report
the results obtained by running the hazard model and including a proxy for tax avoidance. Column 3 and Column 4 show the results obtained by running hazard model and including life cycle dummies in
addition to a variable of tax avoidance. Column 5 and Column 6 report the results obtained by running the hazard model and including: (1) corporate life cycle; (2) tax avoidance and (3) the interaction between
corporate life cycle and tax avoidance, respectively. All the variables are winsorized at 1 and 99% to avoid the impact of outliers. All the models are estimated using standard errors clustered by firms, industry
and year fixed effects. Robust standard errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1
Source(s): Created by authors
Tax planning

331
default

Table 3.
and financial

hazard model
Main pooled analysis:
MD reported) and replicate the analysis. The results remain consistent with those in Columns 1
61,13 and 2. That is, our tax planning proxies are statistically significant in the expected direction
after including life cycle stages.
Columns 5 and 6 show the models with the interaction term of tax planning and life cycle.
The interaction variable measures the difference between the effect of tax planning on a
group of firms in the same life cycle and the main effect (Wooldridge, 2010). Column 5 shows
that the main effect of GAAP ETR does not differ in growing and mature firms, but it differs
332 in the introductory and declining firms. In the case of the latter firms, the coefficient of the
interaction terms is positive and significant, signaling that introductory and declining firms
with higher GAAP ETR (low tax avoidance) are more likely to default. Column 6 shows
consistent and complementary findings. When GAAP ETRVol interacts with the life cycle,
the results show that, in growing and mature firms, the effect of tax volatility on financial
default is significantly higher than the average effect in the full sample, which is measured by
the coefficient of GAAP ETRVol (1.340) (Wooldridge, 2010). In contrast, the interaction of tax
volatility and financial default has a negative and non-significant effect in introductory and
declining firms, indicating that tax volatility does not contribute to a higher financial default
in these firms. In this case, the interaction indicates that introductory and declining firms do
not contribute to the average tax volatility effect on financial default in the full sample, which
is measured by the coefficient of GAAP ETRVol (1.340) (Wooldridge, 2010).
These results are economically significant. Using hazard ratios, we show that, ceteris
paribus, a 1% reduction in ETRs lowers the probability of default by 3.51 and 6.65% in
introductory (eð0:705−ð−0:551ÞÞ 5 3.51) and declining firms (eð1:344−ð−0:551ÞÞ 5 6.65) [8], respectively.
A 1% increase in the tax rate volatility increases the default likelihood by 1.92 and 2.36% in
growing (eð1:996−1:340Þ 5 1.92) and mature firms (eð2:200−1:340Þ 5 2.36), respectively.
These findings support our hypotheses. Introductory and declining firms benefit from tax
planning with a lower likelihood of default, confirming HP1 and HP4. Meanwhile, tax-
planning growing and mature firms are more likely to default, confirming HP2 and HP3. We
replicated the analysis using the logit model and obtained consistent results (available in a
supplementary file upon request).
To ensure robust findings, we follow Hasan et al. (2017) and run a life cycle-wise analysis.
Instead of including life cycle dummy variables together, we included each one by one. We
then interacted each life cycle stage with the tax planning proxies. Table 4 shows the results
for the hazard model and reports only the coefficients of tax planning and the interaction
terms of tax planning and life cycle stages. Across all models in Table 4, the control variables
are significantly associated with Default in the expected direction (not shown). Columns 1 and
2 in Table 4 report the results for the introduction stage. In Column 1, the GAAP ETR is
significantly and negatively associated with Default, signifying that tax-avoiding firms are
more likely to default. The coefficient of the interaction term of tax planning and the
introduction stage is positive and highly significant, showing that introductory firms with
higher ETRs are more likely to default. Hence, unlike other firms, tax-avoiding introductory
firms benefit from tax planning with a lower likelihood of defaulting. Column 2 shows a
consistent and complementary result; GAAP ETRVol is positively and significantly
associated with Default, while the interaction of GAAP ETRVol and the introduction stage is
significantly and negatively associated. This finding indicates that introductory firms with
higher tax volatility are much less likely to default than other firms in the sample. These
findings provide empirical support for HP1, showing that tax-avoiding introductory firms are
less likely to default. Columns 3 and 4 show that growing firms do not display a behavior
different from the average behavior of the full sample, as indicated by the coefficients of the
tax planning measures. The coefficients of the interaction of GAAP ETR and GAAP ETRVol
with the life cycle stage are insignificant and have the same direction as that of the
Hazard Model (life cycle-wise analysis) Default
Introduction Growth Mature Decline
Pred. Sign (1) (2) (3) (4) (5) (6) (7) (8)

Tax avoidance as GAAP ETR

GAAP ETRi,t-1 () 0.831*** 0.571*** 0.491*** 0.769***
(0.205) (0.200) (0.187) (0.192)

Tax avoidance as GAAP ETR volatility

GAAP ETRVoli,(t-1,t-5) (þ) 2.647*** 2.397*** 1.973*** 2.683***
(0.450) (0.456) (0.448) (0.432)

Life cycle 3 Tax avoidance

Introduction 3 GAAP ETRi,t-1 (þ) 1.066***
(0.309)
Growth 3 GAAP ETRi,t-1 () 0.363
(0.247)
Mature 3 GAAP ETRi,t-1 () 0.555**
(0.270)
Decline 3 GAAP ETRi,t-1 (þ) 1.737***
(0.503)

Life cycle 3 Tax avoidance

Introduction 3 GAAP ETRVoli, (t-1,t-5) () 2.012***
(0.724)
Growth 3 GAAP ETRVoli,(t-1,t-5) (þ) 0.249
(0.590)
Mature 3 GAAP ETRVoli,(t-1 t-5) (þ) 1.166*
(0.608)
Decline 3 GAAP ETRVoli,(t-1, t-5) () 2.684***
(1.028)
Observations 90,790 90,790 90,790 90,790 90,790 90,790 90,790 90,790
Stage-specific life cycle dummy YES YES YES YES YES YES YES YES
Model controls YES YES YES YES YES YES YES YES
Year fixed effects YES YES YES YES YES YES YES YES
Industry fixed effects YES YES YES YES YES YES YES YES
Standard error clustered by FIRM FIRM FIRM FIRM FIRM FIRM FIRM FIRM
Note(s): This table represents the estimated coefficients obtained by regressing the hazard model with a dependent binary variable (“Default”) identifying firms entering
Chapter 11 (restructuring) or Chapter 7 (liquidation) at time t, for each stage of the corporate life cycle. Columns 1 and 2 report the results for the introduction stage.
Columns 3 and 4 report the results for the growth stage. Columns 5 and 6 report the results for the mature stage. Columns 7 and 8 report the results for the decline stage. All
control variables included in the model are lagged at 1 year. All the variables are winsorized at 1 and 99% to avoid the impact of outliers. All the models are estimated using
standard errors clustered by firms, industry and year fixed effects. Robust standard errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1
Source(s): Created by authors
Tax planning

333
default

Table 4.
and financial

analysis: hazard model

Main life cycle-wise
MD coefficients of the tax planning measures. This indicates that tax-planning growing firms are
61,13 more likely to default. These findings support HP2. Similarly, Columns 5 and 6 show that the
coefficients of the interaction of GAAP ETR and GAAP ETRVol with the maturity stage are
in the same direction as that of the coefficients of tax planning measures. This indicates that
mature firms with lower effective rates and higher tax volatility are more likely to default.
These findings support HP3. Finally, Column 7 shows that the effect of tax planning is
reversed in declining firms. The coefficient of the interaction of GAAP ETR and the decline
334 stage is positive and highly significant (1.737 and significant at the 1% level), while the
coefficient of GAAP ETR is negative and significant. This result suggests that declining
firms with lower ETRs (tax avoiders) are less likely to default. Column 8 shows that the
prevailing effect of tax volatility on default is positive in the sample, but declining firms show
a different behavior, as shown by the interaction term. Declining firms with higher tax
volatility are also less likely to default, confirming that tax planning negatively affects
financial default in these firms. These findings support HP4.

4.4 Robustness and endogeneity checks

To ensure robust findings, we ran our analyses using a different estimation model (the logit
model) and a different measure of the dependent variable. In the main analyses, following
previous studies (Altman, 1968; Beaver et al., 2010), we measured financial default as
a dummy variable that equaled one for each firm-year observation of a firm if the firm
filed under Chapter 11 or Chapter 7. Otherwise, it equaled zero. To test our results’
robustness, we measured financial default as a dummy variable that equals one for the firm-
year observation in which a firm enters Chapters 11 or 7 and zero otherwise. We obtained
results consistent with those reported above. These findings will be made available in a
supplementary file upon request. We use another measure of the dependent variable and
replicate the analysis. We use the Altman Z-score (Altman, 1968; Ali et al., 2023) [9] as an
alternative to financial default. The results remained consistent with our main findings
(untabulated).
To address potential endogeneity bias from reverse causality, we employ an instrumental
variable two-stage least squares (2SLS) approach that uses the fitted median value of tax
planning as an instrumental variable for tax planning (Dhawan et al., 2020; Hasan et al., 2014).
In the first stage, we regress the median value of tax planning on the life cycle and the
interaction term of tax planning (GAAP ETR) and life cycle plus controls. We then used the
first-stage regression to predict the median value of tax planning. This value (fitted median
tax planning) is the instrumental variable (IV). We use this instrumental variable as an
additional explanatory variable in our second-stage regression, which we performed by
running the main pooled regression and replacing tax planning (GAAP ETR) with the fitted
value of median tax planning. Table 5 reports the results of the 2SLS analysis with the two
alternative measures of the dependent variable. Overall, the results suggest that endogeneity
from reverse causality does not bias the results.
We also address potential endogeneity bias from omitted variables related to past
negative performance. We re-ran our analyses and added controls for performance in the last
three years (Table 6).
Table 6 reports the results obtained when we included a control for three-years lagged
performance in the main model, as opposed to the one-year lagged performance used in the
main analyses. Panels A and B in Table 6 report the results of using GAAP ETR and GAAP
ETRVol as a proxy for tax avoidance, respectively. In both the cases, we analyze data life
cycle-wise. Collectively, the results confirm that past negative performance does not
confound our results. Additional analyses on past performance, available in a supplementary
file upon request, confirm that our findings are robust to endogeneity concerns.
 Default
Tax planning
(1) (2) and financial
default
IV () 1.088* 1.064
(0.635) (1.263)
Introduction 3 IV (þ) 1.378* 2.983*
(0.823) (1.601)
Growth 3 IV () 0.717 0.776 335
(0.690) (1.619)
Mature 3 IV () 0.818 0.924
(0.701) (1.571)
Decline 3 IV (þ) 2.595** 4.136*
(1.165) (2.158)
Observations 90,790 90,790
Life cycle dummies YES YES
Model controls YES YES
Year fixed effects YES YES
Industry fixed effects YES YES
Std. error clustered by FIRM FIRM
Note(s): This table reports the coefficients obtained by running the logit model and using the fitted median tax
avoidance as an instrumental variable for tax avoidance (IV). Column 1 reports the result obtained by defining
the default dependent dummy variable equal to 1 for each firm-year observations of a firm filing under either a Table 5.
Chapter 11 or Chapter 7 bankruptcy procedure, and 0 otherwise. Column 2 reports the results obtained by Addressing
defining the default dependent dummy variable equal to 1 for the firm-year observations in which the firm endogeneity from
enters a bankruptcy procedure, and 0 otherwise. All the variables are winsorized at 1 and 99% to avoid the potential reverse
impact of outliers. Robust standard errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1 causality: instrumental
Source(s): Created by authors variable (IV) approach

5. Discussion and contribution

5.1 Theoretical implications
Many studies on RBV have focused on firms’ resource management across their life cycle and
how managers obtain and use resources to improve performance and avoid financial defaults
(Trahms et al., 2013; Zahra, 2021; Islam and Fatema, 2023). Warnier et al. (2013) suggested
that resource management research should not be limited to investigating strategic
resources; it should be extended to a broader set of resources, such as cash resources, which
are usually underexplored. Tax planning is a resource-generating activity for most
businesses (Edwards et al., 2016; Hanlon and Heitzman, 2010). However, RBV scholars have
only recently acknowledged it as a resource-generating strategy (Hasan et al., 2017),
overlooked when investigating the firm’s survival likelihood in distress conditions (Islam and
Fatema, 2023).
A firm’s life cycle stage influences two key conditions underlying the use of tax planning:
a) ex ante availability of resources and b) resource management (Sirmon et al., 2011; Trahms
et al., 2013; Zahra, 2021). Below, we discuss our results for each life cycle stage, referring to
these two conditions and comparing our findings with that of prior literature.
Our results show that, in introductory firms, resource scarcity increases the propensity to
obtain requisite cash resources from tax planning (Edwards et al., 2016; Higgins et al., 2015;
Cerrato et al., 2023). Simultaneously, owing to their small size and poor performance, tax
planning by introductory firms has limited reputational risks and is unlikely to be strictly
scrutinized by tax authorities (Sirmon et al., 2011; Al-Hadi et al., 2016). Additional resources
obtained with limited risks reduce their default likelihood. Our findings suggest that tax
planning complements other strategies identified by prior literature, which enhance the
introductory firms’ survival likelihood—such as reducing dividend payouts or changing top
managers (Koh et al., 2015; Trahms et al., 2013).
MD Default
61,13 (1) (2) (3) (4) (5)

PANEL A: Results after the inclusion of 3-year long run performance using GAAP ETR
Omitted variable – Past negative performance
1.laggedEBIT_TA 3.189*** 1.938*** 2.176*** 2.029*** 1.962***
336 (0.373) (0.282) (0.282) (0.281) (0.284)
2.laggedEBIT_TA 0.460*** 0.771*** 0.812*** 0.797*** 0.798***
(0.172) (0.139) (0.142) (0.141) (0.141)
3.lagged EBIT_TA 0.883*** 0.824*** 0.923*** 0.863*** 0.898***
(0.136) (0.114) (0.115) (0.114) (0.115)
Life cycle 3 Tax avoidance as GAAP ETR
GAAP ETRi,t-1 0.627*** 0.708*** 0.421** 0.347* 0.619***
(0.224) (0.210) (0.205) (0.193) (0.198)
Life cycle 3 Tax avoidance
Introduction 3 GAAP ETRi,t-1 1.147***
(0.318)
Growth 3 GAAP ETRi,t-1 0.360
(0.251)
Mature 3 GAAP ETRi,t-1 0.558**
(0.272)
Decline 3 GAAP ETRi,t-1 1.617***
(0.499)
Observations 90,790 90,790 90,790 90,790 90,790
Stage-specific life cycle dummy NO YES YES YES YES
Model controls YES YES YES YES YES
Year fixed effects YES YES YES YES YES
Industry fixed effects YES YES YES YES YES
Std. error clustered by FIRM FIRM FIRM FIRM FIRM
PANEL B: Results after the inclusion of three-year long run performance using GAAP ETRVol
Omitted variable – Past negative performance
1.laggedEBIT_TA 2.815*** 2.511*** 2.784*** 2.666*** 2.626***
(0.143) (0.143) (0.142) (0.142) (0.143)
2.laggedEBIT_TA 0.554*** 0.502*** 0.553*** 0.524*** 0.556***
(0.131) (0.131) (0.131) (0.131) (0.133)
3.lagged EBIT_TA 1.091*** 1.017*** 1.096*** 1.015*** 1.088***
(0.139) (0.136) (0.138) (0.138) (0.137)
Life cycle 3 Tax avoidance as GAAP ETR volatility
GAAP ETRVoli,(t-1,t-5) 2.427*** 2.593*** 2.328*** 1.844*** 2.633***
(0.342) (0.366) (0.368) (0.365) (0.347)
Life cycle 3 Tax avoidance
Introduction 3 GAAP ETRVoli,(t-1,t-5) 1.823***
(0.579)
Growth 3 GAAP ETRVoli,(t-1,t-5) 0.354
(0.489)
Mature 3 GAAP ETRVoli,(t-1,t-5) 1.465***
Table 6. (0.484)
Addressing Decline 3 GAAP ETRVoli,(t-1,t-5) 2.935***
endogeneity from (0.930)
omitted variable bias: Observations 90,790 90,790 90,790 90,790 90,790
past negative
performance (continued )
 Default
Tax planning
(1) (2) (3) (4) (5) and financial
default
Stage-specific life cycle dummy NO YES YES YES YES
Model controls YES YES YES YES YES
Year fixed effects YES YES YES YES YES
Industry fixed effects YES YES YES YES YES
Std. error clustered by FIRM FIRM FIRM FIRM FIRM 337
Note(s): Table 6 Panel A displays the coefficients obtained by running the life cycle-wise hazard regressions
with GAAP ETR as independent variable and including a control for past performances. Table 6 Panel B
displays the coefficients obtained by running the life cycle-wise hazard regression with GAAP ETRVol as
independent variable and including a control for past performances. All the variables are winsorized at 1 and
99% to avoid the impact of outliers. Robust standard errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1
Source(s): Created by authors Table 6.

Similar to introductory firms, declining firms must cope with resource scarcity (Koh et al.,
2015). Prior literature emphasizes how declining firms try to boost internal efficiency and
gain support from key stakeholders (Koh et al., 2015). We find that cash resources from tax
planning are likely to be used for restructuring and fulfilling financial obligations as opposed
to being utilized for lenders, suppliers and employees (Dickinson, 2011). Considering this, our
findings suggest that tax planning can supplement divesting and restructuring activities that
help avoid financial default (Zahra, 2021; Hasan et al., 2017; Morrow et al., 2007).
Our research demonstrates that growth firms engaging in aggressive tax planning are
more likely to default. Since growing firms have strong operating cash flows and can raise
cash resources through shareholders and lenders (Dickinson, 2011), tax planning generates
slack resources, which weakens managerial discipline and induces inefficient usage of
resources (Lee and Wu, 2016; George, 2005; Nohria and Gulati, 1996). In other words,
unnecessary tax planning harms efficient resource management and may damage existing
strategic resources (e.g. reputation) (Carnes et al., 2017; Nohria and Gulati, 1996). Indeed,
stakeholders perceive tax planning as a risky activity for growth firms; for instance, they
penalize firms with a higher cost of debt or by limiting their supplies (Cerrato et al., 2023;
Hasan et al., 2017; Flanagan and O’Shaughnessy, 2005).
Tax planning also increases the default risk for mature firms. Prior literature findings
suggest that mature firms have abundant operating cash flows and poor investment
opportunities (Faff et al., 2016; Carnes et al., 2017). Tax planning generates slack resources,
which are likely used for managerial wealth extraction and/or to maintain ongoing negative
net present value projects (Desai et al., 2007). As in the case of growth firms, in a crucial stage
for the firm’s survival, unnecessary aggressive tax planning hinders efficient resource
management and significantly damages the firm’s reputation (Carnes et al., 2017; Nohria and
Gulati, 1996). Damages to reputation from tax planning result in an increased cost of debt and
equity and a higher default risk (Hasan et al., 2017; Duong et al., 2022).
Collectively, our findings enhance the understanding of resource management in different
life cycle stages of firms (Trahms et al., 2013; Carnes et al., 2017; Zahra, 2021). They contribute
to prior literature with evidence that cash savings from tax planning—an overlooked non-
VRIO resource—are managed and allocated in different ways in different life cycle stages,
having a varied impact of default likelihood.
Our research can complement prior studies on slack resources, with evidence on cash
resources. Existing research suggests that the influence of slack resources on performance or
innovation depends on several factors, including the industry (Daniel et al., 2004), type of firm
(public or private; George, 2005), type of slack (absorbed or unabsorbed; Lee and Wu, 2016)
MD and the degree of managerial discretion (Magerakis, 2022). Nohria and Gulati (1996)
61,13 demonstrated that both excessive or insufficient slack resources can hinder innovation.
George (2005) demonstrated that high levels of slack resources hamper the performance of
private firms but not of public firms. Lee and Wu (2016) found that slack resources have a
curvilinear effect on the positive association between R&D expenses and firm performance.
This study complements this literature by showing that the effect of slack resources on the
likelihood of financial default depends on the nature of the slack and the life cycle stage.
338 Excess unabsorbed slack cash resources resulting from tax planning can either increase or
decrease the likelihood of default, depending on the life cycle stage.
The finding that tax planning and financial default are positively associated in growing
and mature firms has another theoretical interpretation based on agency theory (Jensen and
Meckling, 1976; Jensen, 1986). High levels of slack cash resources exacerbate agency conflicts
between shareholders and managers (Jensen, 1986). Thus, firms that use tax planning to
generate cash slack suffer from agency conflicts, causing non-optimal investment decisions,
managerial wealth extraction and reputational risks (Balakrishnan et al., 2019; Desai et al.,
2007; Dhawan et al., 2020; Noga and Schnader, 2013; Shevlin et al., 2020). Overall, our findings
suggest that, regarding tax planning, cash slack has implications for both agency costs and
the optimal management of firm resources at certain life cycle stages. Thus, RBV and agency
theory may be complementary in explaining why tax-aggressive growing and mature firms
are more likely to default. Our study supports the notion that studying the conceptual and
empirical linkage between the agency theory and RBV can help overcome the problems
related to “the unambiguous identification of appropriate resources, specification of testable
hypotheses, and construction of suitable samples” (Lockett and Thompson, 2001, p. 743). It
identifies cash as a key resource and provides testable hypotheses.
Finally, our results have relevant implications for research on corporate tax planning.
Prior literature suggests that tax-planning activities are heterogeneous across a firm’s life
cycle (Cooper and Nguyen, 2020; Hasan et al., 2017). Compared to Hasan et al.’s (2017)
findings, we find that a firm’s life cycle stage needs to be considered to not only understand
why certain firms avoid more taxes than others but also gain insight into why only certain
firms appear to benefit from tax planning.

5.2 Practical implications

Our findings inform entrepreneurs, managers and other practitioners interested in corporate
tax planning. They underline the importance for managers to consider the costs and benefits
associated with using tax planning as a resource-generating strategy in different life cycle
stages. Scholes et al. (2014) posited that effective tax planning strategies should be the result
of considering “all the parties,” “all the costs,” and “all the taxes” involved in decision-making.
The tax benefits and non-tax costs (e.g. reputational and litigation risks) associated with tax
planning likely change throughout a firm’s life cycle (Hasan et al., 2017). Therefore, managers
should consider the firm’s life cycle stage in determining tax planning strategies and balance
the opportunity to create new resources with the need to preserve existing ones, with the
firm’s reputation being the most important.
This study is also of interest to managers assessing the costs and benefits of internal
versus external financing (Cerrato et al., 2023). Tax planning is a useful internal financing
source with costs and benefits varying across life cycle stages and affecting the selection of
internal versus external sources.
Our results also inform managers of the stakeholders’ perceptions of tax planning. Tax
planning is a powerful resource-generating strategy but also poses costs and risks for firms,
such as tax audits, reputational risks and managerial opportunism (Jacob et al., 2021).
Investors, lenders, public authorities, employees and other stakeholders may not expect
aggressive tax planning from healthy and risk-adverse growing and mature firms. They Tax planning
could penalize such firms with a higher cost of debt, a higher cost of capital or reputational and financial
costs (Dhawan et al., 2020; Hasan et al., 2017). Thus, our results recommend managers to
carefully consider the reactions of these stakeholders in deciding to plan taxes in different life
default
cycle stages.
Finally, our study suggests to managers that tax planning may complement other
strategies aimed at ensuring firm’s survival. It also provides a quantitative estimate of the
magnitude of the tax-planning effect on the firm’s survival, holding great significance for 339
managers and stakeholders (Mota et al., 2022; Islam and Fatema, 2023).

5.3 Limitations and future research directions

This study has some limitations. First, it does not investigate firm-specific ownership
structures and internal governance mechanisms, which may affect tax planning. In our
research, we control for firm-level fixed effects and consider the firm’s life cycle stage, which
is related to the degree of development of internal governance structures (i.e. less developed in
the introductory stage and more developed in later stages). However, some heterogeneity
among firms within the same life cycle stage may prevail. Second, although this study uses
robust measures like the GAAP ETR and cash ETR, there are other measures for tax
planning (e.g. income shifting or cross-country transfer pricing) that may have varied effects
across life cycle stages.
Future research could investigate whether ownership structures affect the relationship
between tax planning and default, as moderated by life cycle; for instance, it could focus on
family firms or analyze the demographics of key owners. It could also study whether internal
governance mechanisms limit aggressive tax planning across the life cycle stages. Finally,
future research could investigate the interaction between tax planning and other financing
tools, like, e.g. working capital management or fintech (Liu et al., 2023).

6. Conclusion
Drawing on the RBV, this study investigates the effect of tax planning on the likelihood of
financial default at different life cycle stages. The results show that firms engaging in more
aggressive tax planning are less likely to default in the introduction and decline stages. By
contrast, tax-planning firms are more likely to default in the growth and maturity stages. The
findings suggest that introductory and declining firms efficiently use cash resources from tax
planning to meet their financial needs and acquire further resources that are useful for their
survival. However, in growth and mature firms, tax aggressiveness produces unnecessary
slack resources, weakens managerial discipline and increases reputational risks.
This study contributes to the RBV literature by answering the call for research on
resource management at specific life cycle stages (Trahms et al., 2013; Zahra, 2021). It shows
that cash resources from tax planning are managed in distinctive ways in each life cycle
stage, thereby having a varied impact on the likelihood of default. Our study sheds light on
the underexplored non-VRIO cash resources, and highlights the potential linkages between
the agency theory and RBV (Luu, 2023; Ali et al., 2023).
The results of this research can be informative for managers, investors, lenders and other
stakeholders, as it offers evidence on the tax planning benefits and costs across firms’ life
cycle stages.

Notes
1. Tax planning is the reduction of explicit taxes. It can include legal tax-reduction activities and
aggressive tax-sheltering activities, which are likely challenged in a tax audit (Hanlon and Heitzman,
MD 2010). The authors clarify that “tax avoidance represents a continuum of tax planning strategies
where something like municipal bond investments is at one end (lower explicit tax, perfectly legal)
61,13 and practices such as ‘noncompliance,’ ‘evasion,’ ‘aggressiveness’ and ‘sheltering’ closer to the other
end” (Hanlon and Heitzman, 2010). In this study, tax planning is considered synonymous with tax
avoidance (see also Cooper and Nguyen, 2020).
2. Sirmon et al. (2007) defined resource management as “the comprehensive process of structuring,
bundling and leveraging a firm’s resources to creating value for customers and competitive
340 advantages for the firm.”
3. The literature review presented in this section is based on a systematic literature review for
identifying and critically appraising relevant research (Snyder, 2019). The algorithmic tool used to
search in relevant databases is available in a supplemental file to this paper, to ensure transparency
and reproducibility (Davis et al., 2014).
4. For example, Carnes et al. (2017) investigated a sample of growing and mature firms and found that
firms manage their resource portfolio and capabilities to develop innovation based on the firm’s life-
cycle stage. Tariq et al. (2020) showed that, compared to growing firms, mature firms devote more
financial and non-financial internal resources to undertake environmental investments.
5. Slack is a pool of resources over the minimum required for a given level of organizational output (Lee
and Wu, 2016; Singh, 1986). Cash is a desirable slack for managers because it represents an
unabsorbed available slack and is highly flexible and easily redeployed (Lee and Wu, 2016).
6. Chapter 11 of the US Bankruptcy Code is a court-supervised reorganization procedure aimed at
reducing financial distress and allowing firms to continue to operate as a going concern. Chapter 7 of
the US Bankruptcy Code is a liquidation procedure aimed at satisfying creditors’ claims.
7. OANCF, IVNCF and FINCF is the operating cash flow from operating, investing and financing
activities, respectively.
8. See Table 4.
9. The authors generate a Z-score variable by using parameters from Altman (1968).
Z-score 5 1.2*(WC_TA) þ 1.4*(RE_TA) þ3.3*(Ebit_TA) þ0.6(MV_TL) þ0.999*(S_TA).

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(The Appendix follows overleaf)

MD Supplemental File
“Tax planning and financial default: role of corporate life cycle”
61,13

Non-defaulted firms Defaulted firms Total

346 Introduction
6,596 (92.37%) 545 (7.63%) 7,141 (7.87%)
Growth
29,430 (98.50%) 419 (1.5%) 29,849 (32.87%)
Mature
40,267 (98.64%) 554 (1.36%) 40,821 (44.96%)
Shake-out
9,970 (96.8%) 322 (3.12%) 10,292 (11.35%)
Decline
Table S1.
2,406 (89.54%) 281 (10.46%) 2,687 (2.95%)
Breakdown defaulted
and non-defaulted Total 88,669 (97.6%) 2,121 (2.3%) 90,790 (100%)
firm-year observation Note(s): This table shows the defaulted, non-defaulted and the total number of firm-year observations for each
for each life cycle’s stage of the corporate life cycle at time t
stages Source(s): Created by authors
 Default
Pred. Sign (1) (2) (3) (4) (5) (6)

Tax avoidance as GAAP ETR

GAAP ETRi,t-1 () 0.807*** 0.749*** 0.616*
(0.210) (0.211) (0.373)
Tax avoidance as GAAP ETR volatility
GAAP ETRVoli,(t-1, t-5) (þ) 3.159*** 2.827*** 1.727**
(0.368) (0.371) (0.698)
Life cycle 3 Tax avoidance
Introduction 3 GAAP ETRi, t-1 (þ) 0.642
(0.473)
Growth 3 GAAP ETRi,t-1 () 0.450
(0.426)
Mature 3 GAAP ETRi,t-1 () 0.508
(0.437)
Decline 3 GAAP ETRi,t-1 (þ) 1.292**
(0.630)
Life cycle 3 Tax avoidance
Introduction 3 GAAP ETRVoli,(t-1, t-5) () 0.699
(0.884)
Growth 3 GAAP ETRVoli,(t-1, t-5) (þ) 2.033**
(0.796)
Mature 3 GAAP ETRVoli,(t-1, t-5) (þ) 2.195***
(0.769)
Decline 3 GAAP ETRVoli,(t-1, t-5) () 1.238
(1.056)

(continued )
Tax planning

347
default
and financial

Table S2.

logit model
Main pooled analysis:
 MD

348
61,13

Table S2.
Default
Pred. Sign (1) (2) (3) (4) (5) (6)

Observations 90,790 90,790 90,790 90,790 90,790 90,790

Life cycle dummies NO NO YES YES YES YES
Model controls YES YES YES YES YES YES
Year fixed effects YES YES YES YES YES YES
Industry fixed effects YES YES YES YES YES YES
Standard errors clustered by FIRM FIRM FIRM FIRM FIRM FIRM
Pseudo R2 0.121 0.135 0.133 0.148 0.133 0.149
Note(s): This table reports the estimated coefficients obtained by regressing the logit model with a dependent binary variable (“Default”) identifying firms entering
Chapter 11 (restructuring) or Chapter 7 (liquidation) procedures at time t. Columns 1, 3 and 5 report the results obtained by including a 1-year lagged GAAP ETR variable,
calculated by taking the total income tax expense at time t-1 on the pre-tax accounting income at time t-1 (Hanlon and Heitzman, 2010). The higher the GAAP ETR is, the
lower is the level of tax avoidance is. Columns 2, 4 and 6 report the results obtained by using a 1-year lagged GAAP ETRVol variable, calculated as the standard deviation
of GAAP ETR from time t-1 to time t-5. The higher the GAAP ETRVol is, the higher the level of risk associated with the firm’s tax position is. The control variables used in
the models are: (1) working capital on total assets (WC_TA), (2) retained earnings on total assets (RE_TA), (3) EBIT on total assets (EBIT_TA), (4) market value of equity
on total liabilities (MV_TL) and (5) sales on total assets (S_TA). All control variables included in the model are lagged at 1-year. Columns 1 and 2 report the results obtained
by running the logit model and including our proxies for tax avoidance. Column 3 and Column 4 show the results obtained by running the logit model and including the life
cycle dummies, in addition to tax avoidance. Column 5 and Column 6 report the results obtained by running the logit model and including: (1) corporate life cycle, (2) tax
avoidance and (3) the interaction between corporate life cycle and tax avoidance, respectively. All the variables are winsorized at 1 and 99% to avoid the impact of outliers.
All the models are estimated using standard errors clustered by firms, industry and year fixed effects. Robust standard errors in parentheses. ***p < 0.01,
**p < 0.05, *p < 0.1
Source(s): Created by authors
Logit Model (life
cycle-wise
analysis) Default
Introduction Growth Mature Decline
Pred.
Sign (1) (2) (3) (4) (5) (6) (7) (8)

Tax avoidance as GAAP ETR

GAAP ETRi,t-1 () 0.930*** 0.718*** 0.632*** 0.876***
(0.228) (0.225) (0.211) (0.215)
Tax avoidance as GAAP ETR Volatility
GAAP (þ) 3.334*** 2.997*** 2.615*** 3.331***
ETRVoli,(t-1,t-5) (0.390) (0.394) (0.394) (0.376)
Life cycle 3 Tax avoidance
Introduction 3 (þ) 1.004***
GAAP ETRi,t-1 (0.360)
Growth 3 GAAP () 0.290
ETRi,t-1 (0.275)
Mature 3 GAAP () 0.495*
ETRi,t-1 (0.298)
Decline 3 GAAP (þ) 1.665***
ETRi,t-1 (0.566)
Life cycle 3 Tax avoidance
Introduction 3 () 2.374***
GAAP ETRVoli, (0.654)
(t-1,t-5)
Growth 3 GAAP (þ) 0.583
ETRVoli,(t-1,t-5) (0.510)
Mature 3 GAAP (þ) 1.190**
ETRVoli,(t-1 t-5) (0.515)
Decline 3 GAAP () 2.806***
ETRVoli,(t-1, t-5) (0.940)

(continued )
Tax planning

349
default
and financial

analysis: logit model

Table S3.
Life cycle-wise
 MD

350
61,13

Table S3.
Logit Model (life
cycle-wise
analysis) Default
Introduction Growth Mature Decline
Pred.
Sign (1) (2) (3) (4) (5) (6) (7) (8)

Observations 90,790 90,790 90,790 90,790 90,790 90,790 90,790 90,790

Stage-specific life YES YES YES YES YES YES YES YES
cycle dummy
Model controls YES YES YES YES YES YES YES YES
Year fixed effects YES YES YES YES YES YES YES YES
Industry fixed YES YES YES YES YES YES YES YES
effects
Standard error FIRM FIRM FIRM FIRM FIRM FIRM FIRM FIRM
clustered by
Note(s): This table reports the estimated coefficients obtained by regressing the logit model with a dependent binary variable (“Default”) identifying firms entering
Chapter 11 (restructuring) or Chapter 7 (liquidation) procedures at time t. Columns 1 and 2 report the results for the introduction stage. Columns 3 and 4 report the results
for the growth stage. Columns 5 and 6 report the results for the mature stage. Columns 7 and 8 report the results for the decline stage. All control variables included in the
model are lagged at 1-year. All the variables are winsorized at 1 and 99% to avoid the impact of outliers. All the models are estimated using standard errors clustered by
firms, industry and year fixed effects. Robust standard errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1
Source(s): Created by authors
 Default
Tax planning
Pred. Sign (1) (2) and financial
default
Tax avoidance as GAAP ETR
GAAP ETRi,t-1 () 0.784
(0.768)
Tax avoidance as GAAP ETR volatility 351
GAAP ETRVoli,(t-1,t-5) (þ) 0.963
(1.178)
Life cycle 3 Tax avoidance
Introduction 3 GAAP ETRi,t-1 (þ) 1.628*
(0.972)
Growth 3 GAAP ETRi,t-1 () 0.287
(1.037)
Mature 3 GAAP ETRi,t-1 () 0.225
(1.016)
Decline 3 GAAP ETRi,t-1 (þ) 2.203*
(1.236)
Life cycle 3 Tax avoidance
Introduction 3 GAAP ETRVoli,(t-1,t-5) () 1.556
(1.497)
Growth 3 GAAP ETRVoli,(t-1,t-5) (þ) 1.114
(1.643)
Mature 3 GAAP ETRVoli,(t-1,t-5) (þ) 3.926***
(1.480)
Decline 3 GAAP ETRVoli,(t-1,t-5) () 1.311
(1.796)
Observations 90,790 90,790
Life cycle dummies YES YES
Model controls YES YES
Year fixed effects YES YES
Industry fixed effects YES YES
Standard errors clustered by FIRM FIRM
Note(s): This table reports the pooled estimated coefficients obtained by running the logit model and using an
alternative definition of the dependent variable. In this table, the Default dependent variable is defined as a
dummy variable equal to 1 for the firm-year observations in which the firm enters the Chapter 11 or Chapter 7
procedure, and 0 otherwise. Column 1 reports the results obtained by using the 1-year lagged GAAP ETR as
explanatory variable for tax avoidance. Column 2 reports the results obtained by using the 1-year lagged
GAAP ETRVol as explanatory variable for tax avoidance. Control variables used in the models are: (1) working
capital on total assets (WC_TA), (2) retained earnings on total assets (RE_TA), (c) EBIT on total assets (EBIT_
TA), (4) market value of equity on total liabilities (MV_TL) and (5) sales on total assets (S_TA). All control Table S4.
variables included in the model are lagged at 1-year. Both columns report the results obtained by running the Robustness check:
logit model and including: (1) corporate life cycle, (2) tax avoidance and (3) the interaction of each stage of the pooled analysis using
corporate life cycle for tax avoidance, respectively. All the variables are winsorized at 1 and 99% to avoid the an alternative
impact of outliers. Robust standard errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1 definition of the
Source(s): Created by authors dependent variable
 MD

352
61,13

Table S5.

definition of the
cycle-wise analysis

dependent variable
using an alternative
Robustness check: life
Default
Introduction Growth Mature Decline
Pred.
Sign (1) (2) (3) (4) (5) (6) (7) (8)

Tax avoidance as GAAP ETR

GAAP ETRi,t-1 () 0.822** 0.213 0.148 0.603
(0.406) (0.400) (0.405) (0.372)
Tax avoidance as GAAP ETR volatility
GAAP ETRVoli,(t-1,t-5) (þ) 2.803*** 2.272*** 1.043* 2.518***
(0.545) (0.515) (0.547) (0.500)
Life cycle 3 Tax avoidance
Introduction 3 GAAP (þ) 1.900***
ETRi,t-1 (0.733)
Growth 3 GAAP ETRi,t- () 0.817
1 (0.783)
Mature 3 GAAP ETRi,t- () 0.893
1 (0.758)
Decline 3 GAAP ETRi,t-1 (þ) 2.359**
(1.055)
Life cycle 3 Tax avoidance
Introduction 3 GAAP () 3.507***
ETRVoli, (t-1,t-5) (1.092)
Growth 3 GAAP (þ) 0.424
ETRVoli,(t-1,t-5) (1.235)
Mature 3 GAAP (þ) 3.615***
ETRVoli,(t-1 t-5) (1.041)
Decline 3 GAAP () 2.755*
ETRVoli,(t-1, t-5) (1.493)
Observations 90,790 90,790 90,790 90,790 90,790 90,790 90,790 90,790
Stage-specific life cycle YES YES YES YES YES YES YES YES
dummy

(continued )
 Default
Introduction Growth Mature Decline
Pred.
Sign (1) (2) (3) (4) (5) (6) (7) (8)

Model controls YES YES YES YES YES YES YES YES
Year fixed effects YES YES YES YES YES YES YES YES
Industry fixed effects YES YES YES YES YES YES YES YES
Standard error clustered FIRM FIRM FIRM FIRM FIRM FIRM FIRM FIRM
by
Note(s): This table reports the coefficients for each stage of the corporate life cycle obtained by running the logit model and using an alternative definition of the
dependent variable. Columns 1 and 2 report the results for the introduction stage. Columns 3 and 4 report the results for the growth stage. Columns 5 and 6 report the
results for the mature stage. Columns 7 and 8 report the results for the decline stage. All the variables are winsorized at 1 and 99% to avoid the impact of outliers. Robust
standard errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1
Source(s): Created by authors
Tax planning

353
default
and financial

Table S5.
MD Default
61,13 (1) (2) (3) (4)

PANEL A: Results after the inclusion of 3-year long run performance using GAAP ETR (Logit Model)
Omitted variable – Past negative performance
1.laggedEBIT_TA 2.973*** 3.296*** 3.085*** 3.050***
354 (0.355) (0.355) (0.353) (0.356)
2.laggedEBIT_TA 0.820*** 0.868*** 0.849*** 0.855***
(0.159) (0.160) (0.160) (0.160)
3.lagged EBIT_TA 0.966*** 1.067*** 1.002*** 1.036***
(0.130) (0.130) (0.130) (0.130)
Life cycle 3 Tax avoidance as GAAP ETR
GAAP ETRi,t-1 0.801*** 0.560** 0.485** 0.726***
(0.235) (0.232) (0.220) (0.223)
Life cycle 3 Tax avoidance
Introduction 3 GAAP ETRi,t-1 1.105***
(0.373)
Growth 3 GAAP ETRi,t-1 0.292
(0.281)
Mature 3 GAAP ETRi,t-1 0.491
(0.302)
Decline 3 GAAP ETRi,t-1 1.680***
(0.582)
Observations 90,790 90,790 90,790 90,790
Stage-specific life cycle dummy YES YES YES YES
Model controls YES YES YES YES
Year fixed effects YES YES YES YES
Industry fixed effects YES YES YES YES
Std. error clustered by FIRM FIRM FIRM FIRM
PANEL B: Results after the inclusion of 3-year long run performance using GAAP ETRVol (Logit Model)
Omitted variable – Past negative performance
1.laggedEBIT_TA 3.335*** 3.652*** 3.494*** 3.473***
(0.179) (0.176) (0.175) (0.175)
2.laggedEBIT_TA 0.553*** 0.574*** 0.538*** 0.552***
(0.158) (0.157) (0.157) (0.157)
3.lagged EBIT_TA 1.211*** 1.311*** 1.211*** 1.284***
(0.159) (0.158) (0.159) (0.159)
Life cycle 3 Tax avoidance as GAAP ETR volatility
GAAP ETRVoli,(t-1,t-5) 2.994*** 2.850*** 2.322*** 3.110***
(0.423) (0.432) (0.430) (0.408)
Life cycle 3 Tax avoidance
Introduction 3 GAAP ETRVoli,(t-1,t-5) 1.918***
(0.735)
Growth 3 GAAP ETRVoli,(t-1,t-5) 0.190
(0.550)
Mature 3 GAAP ETRVoli,(t-1,t-5) 1.322**
(0.547)
Decline 3 GAAP ETRVoli,(t-1,t-5) 3.833***
Table S6.
Addressing (1.104)
endogeneity from Observations 90,790 90,790 90,790 90,790
omitted variable bias: Stage-specific life cycle dummy YES YES YES YES
past negative
performance (continued )
 Default
Tax planning
(1) (2) (3) (4) and financial
default
Model controls YES YES YES YES
Year fixed effects YES YES YES YES
Industry fixed effects YES YES YES YES
Std. error clustered by FIRM FIRM FIRM FIRM
Note(s): Table S6 Panel A shows the results obtained by running the life cycle-wise logit regression using 355
GAAP ETR as independent variable and including a control for past performances. Table S06 Panel B shows
the results obtained by running the life cycle-wise logit regression using GAAP ETRVol as independent
variable and including a control for past performances. In both the cases, Column 1 reports the results at the
introduction stage and including a measure of 3-year lagged performance. Column 2 reports the results at the
growth stage and including a measure of 3-year lagged performance. Column 3 reports the results obtained at
the mature stage and including a measure of 3-year lagged performance. Column 4 reports the results at the
decline stage and including a measure of 3-year lagged performance. 3-year lagged firm performance is proxied
by using lagged values of EBIT_TA other than the 1-year lagged EBIT_TA already included in the model as a
control variable. All the variables are winsorized at 1 and 99% to avoid the impact of outliers. Robust standard
errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1
Source(s): Created by authors Table S6.

Corresponding author
Alessandro Gabrielli can be contacted at: alessandro.gabrielli@unipi.it

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