Use of Increased Operating Cash Flow by Firms that Avoid Taxes

51 Pages Posted: 7 Aug 2017

See all articles by David A. Guenther

David A. Guenther

University of Oregon - Department of Accounting

Kenneth Njoroge

College of William and Mary - Mason School of Business

Brian Williams

Indiana University - Kelley School of Business - Department of Accounting

Date Written: August 3, 2017

Abstract

We investigate whether firms use pretax cash flow freed-up by tax avoidance to make real investments. We expect uncertainty about tax avoidance to affect how this cash is used, and predict that firms facing low (high) financial constraints will use more of this cash for real investments (savings). Using a flow-of-funds model we identify uses of pretax operating cash flow, demonstrate how these uses change as tax avoidance increases, and find results generally consistent with predictions. We separate cash flow freed-up by permanent (temporary) strategies and find firms use this cash flow for real investment (reducing external financing).

Keywords: Tax Avoidance; Cash Holdings; Financial Constraints; Multinational Corporations

JEL Classification: G31, H20

Suggested Citation

Guenther, David A. and Njoroge, Kenneth and Williams, Brian, Use of Increased Operating Cash Flow by Firms that Avoid Taxes (August 3, 2017). Available at SSRN: https://ssrn.com/abstract=3013215 or http://dx.doi.org/10.2139/ssrn.3013215

David A. Guenther (Contact Author)

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-5384 (Phone)

Kenneth Njoroge

College of William and Mary - Mason School of Business ( email )

P.O. Box 8795
Williamsburg, VA 23187-8795
United States

Brian Williams

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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