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The Taxman Cometh: Does Tax Uncertainty Affect Corporate Cash Holdings?

47 Pages Posted: 11 Jul 2013 Last revised: 6 Oct 2017

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Edward L. Maydew

University of North Carolina at Chapel Hill

Daniel Saavedra

UCLA Anderson School of Management

Date Written: March 31, 2017

Abstract

We examine whether firms hold more cash in the face of tax uncertainty. Because of gray areas in the tax law and aggressive tax avoidance, the total amount of tax that a firm will pay is uncertain at the time it files its returns. The tax authorities can challenge and disallow the firm’s tax positions, demanding additional cash tax payments. We hypothesize that firms facing greater tax uncertainty hold cash to satisfy these potential future demands. We find that both domestic firms and multinational firms hold larger cash balances when subject to greater tax uncertainty. In terms of economic significance, we find that the effect of tax uncertainty on cash holdings is comparable to that of repatriation taxes. Our evidence adds to knowledge about the real effects of tax avoidance and provides a tax-based precautionary explanation for why there is such wide variation in cash holdings across firms.

Keywords: Cash holdings; Tax avoidance; Tax uncertainty; FIN 48; Disclosures; Long-run repatriation tax costs

JEL Classification: G30; G32; H25

Suggested Citation

Hanlon, Michelle and Maydew, Edward L. and Saavedra, Daniel, The Taxman Cometh: Does Tax Uncertainty Affect Corporate Cash Holdings? (March 31, 2017). Review of Accounting Studies, September 2017, Volume 22, Issue 3, pp 1198–1228 . Available at SSRN: https://ssrn.com/abstract=2292020 or http://dx.doi.org/10.2139/ssrn.2292020

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-668
Cambridge, MA 02142
United States
617-253-9849 (Phone)

Edward Maydew

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

Daniel Saavedra (Contact Author)

UCLA Anderson School of Management ( email )

Los Angeles, CA
United States

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