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

Posted: 5 Aug 2011 Last revised: 1 Apr 2013

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

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Abstract

A traditional view of tax avoidance (or tax aggressiveness) is that it limits payments made to the tax authorities. A first order implication is that tax avoidance will positively impact firm cash holdings. However, recent research contends that tax avoidance strategies impede the flow of firm specific information and consequently permits managers to divert firm resources. In light of this complementary relation between tax avoidance and rent extraction, it is far from clear whether tax avoidance strategies will yield higher cash holdings or in fact lead to lower cash holdings due to rent extraction. Given that cash is a fungible asset, the risk of rent extraction heightened through tax avoidance strategies can also serve to lower the valuation of firm cash holdings. This paper aims to shed empirical light on these issues. We provide three primary findings. First, we find a negative association between tax aggressiveness and firm cash holdings. We find this association to hold across multiple measures of tax aggressiveness. Second, we find this relation is attenuated for firms with stringent governance structures in place. This finding suggests that stringent governance structures limit the adverse effects of tax avoidance strategies in that it constraints managerial ability to divert firm cash holdings. Finally, we find investor valuation of firm cash holdings is lower for high tax avoidance firms. We again find this relation is attenuated for strong governance firms. Overall, our findings contribute to a growing stream of research which questions whether shareholders benefit from aggressive corporate tax avoidance.

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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