Do Corporations Retain Too Much Cash? Evidence from a Natural Experiment

Review of Financial Studies, forthcoming

74 Pages Posted: 21 Dec 2018 Last revised: 11 Nov 2022

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

The University of Illinois at Urbana-Champaign

Date Written: November 10, 2022

Abstract

Corporations have accumulated record amounts of cash. We study whether firms' cash retention has been excessive by examining a Korean reform that introduced a new tax on earnings retained as cash. Difference-in-differences tests show that treated firms reduce cash retention and instead increase payouts and investments. Market participants react favorably to the reform, consistent with excessive cash retention. The valuation effects and the alternative uses of the cash are associated with behavioral and agency frictions. Firms that are more subject to behavioral biases increase payouts and experience higher valuations, while poorly governed firms allocate more to investment and experience relatively lower valuations.

Keywords: Corporate cash, investment, wages, payout policy, natural experiment, tax

JEL Classification: G32, G35, G38

Suggested Citation

Kim, Hwanki Brian and Kim, Woojin and Kronlund, Mathias, Do Corporations Retain Too Much Cash? Evidence from a Natural Experiment (November 10, 2022). Review of Financial Studies, forthcoming, 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)

The University of Illinois at Urbana-Champaign ( email )

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