Do Firms Save Too Much Cash? Evidence from a Tax on Corporate Savings

67 Pages Posted: 21 Dec 2018 Last revised: 23 Sep 2020

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; European Corporate Governance Institute (ECGI)

Mathias Kronlund

Tulane University

Date Written: September 17, 2020

Abstract

We study whether corporate cash holdings are optimal or excessive by exploiting a Korean tax reform that imposes a new tax on earnings not paid out to shareholders or reinvested. Firms treated by the reform reduce cash savings, and market participants react favorably. Increases in value are concentrated among firms subject to memories from the 1997 Asian financial crisis and among well-governed firms, and these firms spend more on payouts. By contrast, no value increases are observed among poorly governed firms, and these firms instead spend more on investments. Overall, our results are consistent with excessive savings before the reform.

Keywords: Corporate Cash, Investment, Payout Policy, Natural Experiment, Valuation, Tax

JEL Classification: G32, G35, G38

Suggested Citation

Kim, Hwanki Brian and Kim, Woojin and Kronlund, Mathias, Do Firms Save Too Much Cash? Evidence from a Tax on Corporate Savings (September 17, 2020). 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

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Mathias Kronlund (Contact Author)

Tulane University ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

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