مالیات: تاثیر عدم اطمینان مالیاتی بر سهام نقدی شرکت The taxman cometh: Does tax uncertainty affect corporate cash holdings?

1 Introduction One of the most fundamental decisions a firm can make is what to do with its cash. We examine whether tax uncertainty causes firms to retain more cash than they otherwise would. Dyreng et al. (2008) show that tax avoidance is pervasive, and researchers have made progress understanding determinants of tax avoidance (e.g., Badertscher et al. 2013; Bradshaw et al. 2016; Chen et al. 2010). However, whether tax avoidance will be sustained is often uncertain at the time it is initiated, and we know little about how this uncertainty affects firm behavior. Due to the complexities and ambiguities present in the tax laws, the tax authorities may have a different opinion of the firm’s true taxes, particularly if the firm has aggressively avoided taxes. Faced with the potential of additional cash demands from tax authorities, we hypothesize that firms have a precautionary motive to hold cash balances that are increasing in their degree of tax uncertainty. There is considerable variation across firms in the amount of cash they hold on their balance sheets. In our sample of publicly traded U.S. firms, for example, there is a sevenfold difference in the ratio of cash to total assets between the 25th and 75th percentiles of multinational firms, and even larger differences in cash holdings exist among purely domestic firms. Holding cash on the balance sheet is costly because of agency problems associated with large cash holdings and because retained cash is less valuable to the firm. It is also associated with declines in return on investment and is subject to mispricing by the market (Dechow et al. 2008). There can be benefits of large cash holdings as well, such as available cash to fulfill capital needs, leading to a precautionary motive to hold cash. Understanding why firms hold cash has been the subject of research for decades, dating back to at least Baumol (1952) and Tobin (1956). While advances have been made in understanding the economic determinants of cash holdings, most of the cross-sectional variation in cash holdings remains unexplained. Our evidence provides a partial explanation for this variation caused by uncertainty about the ultimate success of tax avoidance.1 To test our predictions, we exploit the recent requirement that SEC registrants disclose estimates of their uncertain tax benefits (UTBs, described below), which became effective in 2007 with the enactment of a rule known as FIN 48.2 These data and recent research examining FIN 48 disclosures show that tax uncertainty is an important economic phenomenon (e.g., Robinson et al. 2015; Blouin and Robinson 2014).