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Allocation of internal cash flow when firms pay less tax: The role of state ownership and political connections

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  • Yuqiang Cao
  • Xikai Chen
  • Meiting Lu
  • Yaowen Shan

Abstract

This paper investigates the allocation of internal cash flow among Chinese firms. Compared to their US peers, Chinese firms are less likely to use tax‐related cash for investments, particularly in marketable securities, or to increase cash balance; instead, they mainly use tax‐related cash to reduce their reliance on external financing. Further tests show the differences in cash allocation between Chinese and US firms are more pronounced among Chinese non‐state owned enterprises and firms without political connections. The results highlight the importance of governmental connections in mitigating tax repayment risks and enhancing the flexibility of internal cash allocation.

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  • Yuqiang Cao & Xikai Chen & Meiting Lu & Yaowen Shan, 2025. "Allocation of internal cash flow when firms pay less tax: The role of state ownership and political connections," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 65(2), pages 2013-2034, June.
    • Handle: RePEc:bla:acctfi:v:65:y:2025:i:2:p:2013-2034
    DOI: 10.1111/acfi.13401
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    Cited by:

    1. Haiwei Xu, 2026. "Development of the commercial paper market and corporate default risk," Risk Management, Palgrave Macmillan, vol. 28(2), pages 1-27, May.

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