Professor Mathias Kronlund will present “Do Firms Save Too Much Cash? Evidence from a Tax on Corporate Savings”.
We study whether corporate cash holdings are optimal or excessive by exploiting a Korean tax reform that imposes a new tax on earnings not paid out to shareholders or reinvested. Firms treated by the reform reduce cash savings, and market participants react favorably. Increases in value are concentrated among firms subject to memories from the 1997 Asian financial crisis and among well-governed firms, and these firms spend more on payouts. By contrast, no value increases are observed among poorly governed firms, and these firms instead spend more on investments. Overall, our results are consistent with excessive savings before the reform.