Can tax incentives explain excessive corporate cash holdings? (TAXINCENTIVES)
Firms around the world hold enormous amounts of cash, and, importantly, these surprisingly high cash levels cannot be explained by existing theories. In particular, it is not plausible that these large cash reserves are held only to ease financial distress and to finance future investments. So why do firms hold these excessive amounts of cash? This project proposes a new, tax-related approach to answering this question and aims at rigorously investigating the mechanisms and implications. Specifically, the core agenda of this project is to formalize and study the role of the following tax asymmetry for corporate cash holdings: Payouts (dividends) are taxed, but raising funds does not offer any corresponding tax rebate; thus, dividend taxation leads to a tax-saving motive to retain cash if the funds may be needed later. Further, a credit line, which is an additional source of corporate funds, is also considered and its impact on investment decisions is analyzed.