The Tax Asymmetry Motive to Hold Corporate Cash

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Resumé

Dividends and share repurchases are taxed, but raising funds does not offer a symmetric tax advantage. Hence, it is preferable for the firm to retain cash if the funds may be needed later. The paper formalizes this cash accumulation motive in a corporate finance model that trades off the advantages of saved personal taxes against agency and corporate tax costs of keeping cash inside the firm. Calibration of the model reveals an optimal average cash level of 24% of net asset value, about half of which is explained by the tax asymmetry motive. We present empirical evidence for the tax asymmetry motive by verifying a positive relation between the effective dividend tax rate and corporate cash holdings. We also show theoretically and empirically that this motive is more important for firms with high volatility, low agency cost, and low corporate tax rates.
OriginalsprogEngelsk
Publikationsdato2019
Antal sider45
StatusUdgivet - 2019
BegivenhedEuropean Financial Management Association 2019 Annual Meetings - University of Azores, Ponta Delgada, Island of S. Miguel, Portugal
Varighed: 26 jun. 201929 jun. 2019
Konferencens nummer: 28
https://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2019-Azores/2019%20meetings.php

Konference

KonferenceEuropean Financial Management Association 2019 Annual Meetings
Nummer28
LokationUniversity of Azores
LandPortugal
ByPonta Delgada, Island of S. Miguel
Periode26/06/201929/06/2019
Internetadresse

Citer dette

Dick-Nielsen, J., Miltersen, K. R., & Westermann, R. (2019). The Tax Asymmetry Motive to Hold Corporate Cash. Afhandling præsenteret på European Financial Management Association 2019 Annual Meetings, Ponta Delgada, Island of S. Miguel, Portugal.
Dick-Nielsen, Jens ; Miltersen, Kristian R. ; Westermann, Ramona . / The Tax Asymmetry Motive to Hold Corporate Cash. Afhandling præsenteret på European Financial Management Association 2019 Annual Meetings, Ponta Delgada, Island of S. Miguel, Portugal.45 s.
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title = "The Tax Asymmetry Motive to Hold Corporate Cash",
abstract = "Dividends and share repurchases are taxed, but raising funds does not offer a symmetric tax advantage. Hence, it is preferable for the firm to retain cash if the funds may be needed later. The paper formalizes this cash accumulation motive in a corporate finance model that trades off the advantages of saved personal taxes against agency and corporate tax costs of keeping cash inside the firm. Calibration of the model reveals an optimal average cash level of 24{\%} of net asset value, about half of which is explained by the tax asymmetry motive. We present empirical evidence for the tax asymmetry motive by verifying a positive relation between the effective dividend tax rate and corporate cash holdings. We also show theoretically and empirically that this motive is more important for firms with high volatility, low agency cost, and low corporate tax rates.",
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Dick-Nielsen, J, Miltersen, KR & Westermann, R 2019, 'The Tax Asymmetry Motive to Hold Corporate Cash' Paper fremlagt ved European Financial Management Association 2019 Annual Meetings, Ponta Delgada, Island of S. Miguel, Portugal, 26/06/2019 - 29/06/2019, .

The Tax Asymmetry Motive to Hold Corporate Cash. / Dick-Nielsen, Jens; Miltersen, Kristian R.; Westermann, Ramona .

2019. Afhandling præsenteret på European Financial Management Association 2019 Annual Meetings, Ponta Delgada, Island of S. Miguel, Portugal.

Publikation: KonferencebidragPaperForskningpeer review

TY - CONF

T1 - The Tax Asymmetry Motive to Hold Corporate Cash

AU - Dick-Nielsen, Jens

AU - Miltersen, Kristian R.

AU - Westermann, Ramona

PY - 2019

Y1 - 2019

N2 - Dividends and share repurchases are taxed, but raising funds does not offer a symmetric tax advantage. Hence, it is preferable for the firm to retain cash if the funds may be needed later. The paper formalizes this cash accumulation motive in a corporate finance model that trades off the advantages of saved personal taxes against agency and corporate tax costs of keeping cash inside the firm. Calibration of the model reveals an optimal average cash level of 24% of net asset value, about half of which is explained by the tax asymmetry motive. We present empirical evidence for the tax asymmetry motive by verifying a positive relation between the effective dividend tax rate and corporate cash holdings. We also show theoretically and empirically that this motive is more important for firms with high volatility, low agency cost, and low corporate tax rates.

AB - Dividends and share repurchases are taxed, but raising funds does not offer a symmetric tax advantage. Hence, it is preferable for the firm to retain cash if the funds may be needed later. The paper formalizes this cash accumulation motive in a corporate finance model that trades off the advantages of saved personal taxes against agency and corporate tax costs of keeping cash inside the firm. Calibration of the model reveals an optimal average cash level of 24% of net asset value, about half of which is explained by the tax asymmetry motive. We present empirical evidence for the tax asymmetry motive by verifying a positive relation between the effective dividend tax rate and corporate cash holdings. We also show theoretically and empirically that this motive is more important for firms with high volatility, low agency cost, and low corporate tax rates.

M3 - Paper

ER -

Dick-Nielsen J, Miltersen KR, Westermann R. The Tax Asymmetry Motive to Hold Corporate Cash. 2019. Afhandling præsenteret på European Financial Management Association 2019 Annual Meetings, Ponta Delgada, Island of S. Miguel, Portugal.