Corporate Tax Avoidance and the Level and Valuation of Firm Cash Holdings

44 Pages Posted: 5 Aug 2011 Last revised: 19 Dec 2018

See all articles by Dan S. Dhaliwal

Dan S. Dhaliwal

University of Arizona - Department of Accounting

Shawn X. Huang

Arizona State University (ASU) - School of Accountancy

William J. Moser

Miami University

Raynolde Pereira

University of Missouri at Columbia - School of Accountancy

Abstract

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.

Suggested Citation

Dhaliwal, Dan S. and Huang, Shawn X. and Moser, William J. and Pereira, Raynolde, Corporate Tax Avoidance and the Level and Valuation of Firm Cash Holdings. 2011 American Accounting Association Annual Meeting - Tax Concurrent Sessions. Available at SSRN: https://ssrn.com/abstract=1905076 or http://dx.doi.org/10.2139/ssrn.1905076

Dan S. Dhaliwal (Contact Author)

University of Arizona - Department of Accounting ( email )

McClelland Hall
PO Box 210108
Tucson, AZ 85721
United States

Shawn X. Huang

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

William J. Moser

Miami University ( email )

2027 Farmer School of Business
800 East High Street
Oxford, OH 45056
United States
513-529-8284 (Phone)

Raynolde Pereira

University of Missouri at Columbia - School of Accountancy ( email )

337 Cornell Hall
Columbia, MO 65211
United States
573-882-6253 (Phone)

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