Do Firms Save Too Much Cash? Evidence from a Tax on Corporate Savings
67 Pages Posted: 21 Dec 2018 Last revised: 23 Sep 2020
Date Written: September 17, 2020
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: Suggested Citation