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

71 Pages Posted: 21 Dec 2018 Last revised: 19 Nov 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: November 14, 2019

Abstract

Corporations have accumulated record amounts of cash. Are these savings optimal or excessive? We examine this question by exploiting a Korean tax reform that sought to discourage cash savings by imposing a surtax on earnings that were not paid out to shareholders or invested. This tax applied only to firms with book equity above 50 billion wons or that belonged to a Chaebol. Difference-in-differences tests show that the treated firms reduced cash savings and increased payouts, wages, and investments. These additional investments appear profitable, and an event study analysis shows that shareholders viewed the reform as value-enhancing. These results are consistent with the accumulation of excessive savings before the reform, and we find evidence consistent with both agency-based and behavioral channels underlying such excessive savings.

Keywords: Corporate Cash, Savings, 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 (November 14, 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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