Corporate Tax Avoidance and the Level and Valuation of Firm Cash Holdings
44 Pages Posted: 5 Aug 2011 Last revised: 19 Dec 2018
This paper evaluates the impact of corporate tax avoidance on the level and valuation of firm cash holdings. Two conflicting views motivate this inquiry. One view is that tax avoidance merely limits tax payments. Hence it may or may not increase firm cash holdings, depending on whether the tax savings are utilized or held as cash. A contrary view notes that tax avoidance can negatively impact firm cash holdings as it enables the diversion of firm cash resources by limiting the flow of firm specific information. An added implication of this view is that tax avoidance will also lower the valuation of cash holding since tax avoidance increases the likelihood of diversion of fungible cash resources. We empirically assess these predictions. We find a negative association between tax avoidance and firm cash holdings. We also find tax avoidance negatively impacts the valuation of firm cash holdings. We find these results to hold across multiple measures of tax avoidance. More importantly, we find this relation is attenuated for firms with stringent governance structures in place. Overall, our study is supportive of the contention that aggressive tax avoidance can be contrary to shareholder interests.
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