Work

Tax enforcement and corporate cash holdings

Year: 2024

Type: article

Abstract: Strengthened tax enforcement increases firms’ expected tax liabilities and uncertainty; thus, firms have incentives to hold more cash. Considering the staggered implementation of a new tax system that increases tax enforcement across provinces in China as a quasi‐natural experiment, we employ the difference‐in‐differences method to test the above prediction. The results indicate that stricter tax enforcement is associated with greater corporate cash holdings. This effect is stronger for financially constrained firms and those located in areas with high tax noncompliance penalties. Additionally, tax enforcement increases firms’ propensity to accumulate cash from cash flows and decreases capital expenditures and dividend payouts. The main findings are robust to the stacked difference‐in‐differences method, alternative cash holding measures and different sample selections.

Source: Journal of Business Finance &amp Accounting

DOI: 10.1111/jbfa.12795

Authors: Jiaren Pang, Kun Wang, Le Zhao

Institutions: Tsinghua University, Nankai University

Language: English

Topic: Corporate Finance and Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDG: Peace, justice, and strong institutions

Open Access status: bronze

Funders: Tsinghua University, Jilin Office of Philosophy and Social Science