Review of Accounting Studies

, Volume 22, Issue 3, pp 1198–1228 | Cite as

The taxman cometh: Does tax uncertainty affect corporate cash holdings?

  • Michelle Hanlon
  • Edward L. Maydew
  • Daniel Saavedra
Article

Abstract

We examine whether firms hold more cash in the face of tax uncertainty. Because of gray areas in the tax law and aggressive tax avoidance, the total amount of tax that a firm will pay is uncertain at the time it files its returns. The tax authorities can challenge and disallow the firm’s tax positions, demanding additional cash tax payments. We hypothesize that firms facing greater tax uncertainty hold cash to satisfy these potential future demands. We find that both domestic firms and multinational firms hold larger cash balances when subject to greater tax uncertainty. In terms of economic significance, we find that the effect of tax uncertainty on cash holdings is comparable to that of repatriation taxes. Our evidence adds to knowledge about the real effects of tax avoidance and provides a tax-based precautionary explanation for why there is such wide variation in cash holdings across firms.

Keywords

Cash holdings Tax avoidance Tax uncertainty FIN 48 Disclosures Long-run repatriation tax costs 

JEL classification

G30 G32 H25 

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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  • Michelle Hanlon
    • 1
  • Edward L. Maydew
    • 2
  • Daniel Saavedra
    • 3
  1. 1.Cambridge, Massachusetts Institute of Technology Sloan School of ManagementCambridgeUSA
  2. 2.University of North CarolinaChapel HillUSA
  3. 3.UCLA Anderson School of ManagementLos AngelesUSA

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