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

71 Pages Posted: 21 Dec 2018 Last revised: 2 Sep 2021

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 1, 2021

Abstract

Corporations have accumulated record amounts of cash. We study whether firms' cash retention has been excessive by exploiting 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 affected by behavioral biases increase payouts, resulting in relatively 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 (September 1, 2021). 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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