Discouraging Corporate Savings

55 Pages Posted: 21 Dec 2018 Last revised: 2 Feb 2019

See all articles by Hwanki Brian Kim

Hwanki Brian Kim

Baylor University - Department of Finance, Insurance & Real Estate

Woojin Kim

Seoul National University - Business School

Mathias Kronlund

University of Illinois at Urbana-Champaign

Date Written: February 1, 2019

Abstract

Corporations world over have amassed record levels of cash on their balance sheets. We study the effects of a unique tax reform in South Korea in 2015 that sought to stem the tide of corporate cash accumulation. Firms with shareholder's equity above 50B Won, or that were part of larger business groups (Chaebol), had to pay a sur-tax of 10% on any earnings above a threshold that were saved rather than invested or paid out to shareholders. Employing a difference-in-difference design, we find that the treated firms cut cash savings and instead direct earnings mainly towards new investments, resulting in stronger revenue growth, as well as towards higher wage increases and shareholder payouts. We find no evidence of reduced profitability, suggesting that these marginal investments were profitable. An event study analysis shows that shareholders reacted positively to firms being subject to the surtax, implying that shareholders viewed benefits from discouraging savings to outweigh the costs from a potentially higher tax bill. These findings suggest that firms were underinvesting and saving excessively prior to the tax change.

Keywords: Corporate Cash, Savings, Investment, Natural Experiment, Tax

JEL Classification: G32, G35, G38

Suggested Citation

Kim, Hwanki Brian and Kim, Woojin and Kronlund, Mathias, Discouraging Corporate Savings (February 1, 2019). Available at SSRN: https://ssrn.com/abstract=3288866 or http://dx.doi.org/10.2139/ssrn.3288866

Hwanki Brian Kim

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States

Woojin Kim

Seoul National University - Business School ( email )

1 Gwanak-ro, Gwanak-gu
Seoul, 08826
Korea, Republic of (South Korea)
82-2-880-5831 (Phone)

HOME PAGE: http://cba.snu.ac.kr/en/faculty?mode=view&memberidx=60582&major=6

Mathias Kronlund (Contact Author)

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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