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Do Corporations Retain Too Much Cash? Evidence from a Natural Experiment

Author

Listed:
  • Hwanki Brian Kim
  • Woojin Kim
  • Mathias Kronlund

Abstract

Corporations have accumulated record amounts of cash. We study whether firms’ cash retention has been excessive by examining a Korean reform that introduced a new tax on earnings retained as cash. Difference-in-differences tests show that treated firms reduce cash retention and instead increase payouts and investments. Market participants react favorably to the reform, consistent with excessive cash retention. The valuation effects and the alternative uses of the cash are associated with behavioral and agency frictions. Firms that are more subject to behavioral biases increase payouts and experience higher valuations, while poorly governed firms allocate more to investment and experience relatively lower valuations.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Hwanki Brian Kim & Woojin Kim & Mathias Kronlund, 2023. "Do Corporations Retain Too Much Cash? Evidence from a Natural Experiment," The Review of Financial Studies, Society for Financial Studies, vol. 36(7), pages 2839-2877.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:7:p:2839-2877.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhac094
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    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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