The Tax Asymmetry Motive to Hold Corporate Cash

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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.
Original languageEnglish
Publication date2019
Number of pages45
Publication statusPublished - 2019
EventEuropean Financial Management Association 2019 Annual Meetings - University of Azores, Ponta Delgada, Island of S. Miguel, Portugal
Duration: 26 Jun 201929 Jun 2019
Conference number: 28
https://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2019-Azores/2019%20meetings.php

Conference

ConferenceEuropean Financial Management Association 2019 Annual Meetings
Number28
LocationUniversity of Azores
CountryPortugal
CityPonta Delgada, Island of S. Miguel
Period26/06/201929/06/2019
Internet address

Cite this

Dick-Nielsen, J., Miltersen, K. R., & Westermann, R. (2019). The Tax Asymmetry Motive to Hold Corporate Cash. Paper presented at 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. Paper presented at European Financial Management Association 2019 Annual Meetings, Ponta Delgada, Island of S. Miguel, Portugal.45 p.
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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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language = "English",
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Dick-Nielsen, J, Miltersen, KR & Westermann, R 2019, 'The Tax Asymmetry Motive to Hold Corporate Cash' Paper presented at, 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. Paper presented at European Financial Management Association 2019 Annual Meetings, Ponta Delgada, Island of S. Miguel, Portugal.

Research output: Contribution to conferencePaperResearchpeer-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. Paper presented at European Financial Management Association 2019 Annual Meetings, Ponta Delgada, Island of S. Miguel, Portugal.