Use of Increased Operating Cash Flow by Firms that Avoid Taxes

Guenther, David A.; Njoroge, Kenneth; Williams, Brian

doi:10.2139/ssrn.3013215

Cited by 8 publications

(11 citation statements)

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“…Our study is most closely related to Edwards et al(2016b) and concurrent research by Guenther et al (2017), both of which examine firms' use of cash savings within the context of constraints. Edwards et al (2016) find the firms' cash tax savings are positively associated with firms' level of investment.…”

Section: Introductionmentioning

confidence: 73%

“…For example, instead of minimizing cash taxes paid as a source of funds, management might gain access to additional cash flows by aggressively reducing current period expenses such as research and development, capital replacement, or personnel expenses. These decisions, however, will likely lead to significant operational problems in the near-term and lower profitability in the longterm (Edwards et al 2016b;Guenther et al 2017).…”

Section: Introductionmentioning

confidence: 99%

“…Edwards et al (2016) find the firms' cash tax savings are positively associated with firms' level of investment. 7 Guenther et al (2017) compare how cash tax savings are used relative to other cash flow sources and find that financially constrained firms are more likely to use cash tax savings to fund real investment. Because we use an international sample of firms, our focus is broader than these previous studies that focus on a US-only sample of multinational and/or domestic firms.…”

Section: Introductionmentioning

confidence: 99%

“…We note concurrent research byGuenther et al (2017).Specifically, Guenter et al (2017) use a US-only sample of multinational and domestic firms to examine the effect of cash tax avoidance on the level of real investment. (e.g., CapEx) and how that effect varies for financially-constrained firms.2 We note that we lack detailed loan data for the broad international sample and thus do not perform tests regarding the use of cash tax savings to pay off loans.…”

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confidence: 98%

“…Our study is also related to concurrent research by Guenther et al (2017), who use a US-domiciled sample of multinational and domestic firms, to investigate how firms use cash tax savings in the face of financial constraints.…”

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confidence: 99%

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How Do Firms Use Cash Tax Savings: A Cross-Country Analysis

Kerr

Green

2016

SSRN Journal

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Avoiding cash taxes can serve as a significant source of additional cash flows for firms, though how managers utilize these funds and the resulting consequences remain open empirical questions. We provide answers by examining the association between the amount of cash tax savings and two uses of cash -investment and dividend payout -for an international sample of firms. We find that firms are more likely to invest cash tax savings rather than distribute them in the form of dividends and that this results in inefficient overinvestment. We find that our results hold for an international sample of domestic-only firms, distinguishing our study from US-only studies, which focus on constraints and distortions of multinational corporations in a worldwide tax system. We find nuanced results when partitioning on country-level governance. Our results suggest cash tax avoidance has real effects on firm decisions, namely investment and payout policies, and this effect varies based on the country in which the firm operates.JEL classifications: M41, H20, G31, G30 Investment:Invest The sum of research and development expenditures, capital expenditures and acquisitions less dispositions of property plant and equipment, deflated by total assets in t-1 (Biddle et al. 2009). absInvestEff The absolute value of the error term from a regression of Invest on the percentage change in sales (Biddle et al. 2009). CapExCapital expenditures less dispositions of property plant and equipment, deflated by total assets in t-1. Non-CapExThe sum of research and development expenditures and acquisitions, deflated by total assets in t-1. IntangiblesIntangibles deflated by total assets in t-1. DivPay:CashDiv Cash dividends paid scaled by total assets in year t. PayoutDividends less gain/loss on the sale of stock scaled by lagged total assets. Cash Tax Savings: CTSThe country's statutory tax rate less the cash effective tax rate (computed as cash taxes paid divided by pre-tax income). CTS is set to missing if pretax income is negative. Governance: LowGovIndicator variable set equal to one if the firm is located in a country in the lowest tercile of Bushman, Piotroski and Smith (2004) governance index. Control Variables:CloseShares Closely-held shares at t divided by total shares outstanding at t. AQAccrual quality, based on Dechow and Dichev (2002) and Biddle et al. (2009), computed as -1 times the standard deviation of the residual (from t-5 to t-1) obtained from regressing a change in working capital on cash from operations in t+1, cash from operations in t, cash from operations in t-1, change in revenue, and property plant and equipment, with all variables scaled by total assets in t-1. The model is estimated by country, industry and year, provided the country-industry-year has 10 or more observations. σCFO Standard deviation, computed from year t-5 to year t-1, of cash flow from operations scaled by total assets in t-1. Does investment efficiency improve after the disclosure of material weaknesses in internal control over financial reporting? Jou...

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Section: Introductionmentioning

confidence: 73%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

mentioning

confidence: 98%

mentioning

confidence: 99%

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How Do Firms Use Cash Tax Savings: A Cross-Country Analysis

Kerr

Green

2016

SSRN Journal

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Tax Avoidance and Asymmetric Cost Behavior

Zheng

2018

Journal of Accounting, Auditing & Finance

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This study examines the relationship between tax avoidance and asymmetric cost behavior. This relationship arises due to direct economic benefits of cash savings from tax avoidance. On one hand, cash savings from tax avoidance may prompt managers to retain excess resources when activity goes down. On the other hand, tax avoidance may alleviate managers’ concerns about adjustment costs due to cost reductions in sales downturns. Using a large sample spanning the 1993-2013 period, we document a significantly negative relationship between tax avoidance, proxied by cash effective tax rate, and asymmetric cost behavior. The result suggests that asymmetric cost behavior is less pronounced when tax avoidance is higher. We further find that this relationship varies with firms’ business strategies, cash flow volatility, and tax fees paid to the auditor. This study advances the understanding of accounting researchers on the relationship between tax avoidance and managers’ resource adjustment decisions.

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