Allocation of Internal Cash Flow when Firms Pay Less Tax Academic Article uri icon


  • ABSTRACT We provide evidence about allocations of cash flow freed up by not paying taxes (tax-related cash). Uncertainty about future repayments suggests firms may use tax-related cash more cautiously than other cash flow. We utilize a flow-of-funds model from finance to quantify the relative amounts of tax-related cash associated with various potential uses of operating cash flow. We find firms allocate tax-related cash differently than other after-tax cash flow. Prior studies find tax avoiders hold more cash, and our results suggest this is because firms invest less (and save more) tax-related cash. We also find that the allocation of tax-related cash varies with relative financial constraints, economic uncertainty, and firms' multinational status in ways consistent with prior findings. For example, firms facing relatively higher levels of financial constraints invest a lower (higher) percentage of tax-related cash in capital expenditures (marketable securities and R&D), possibly to preserve funds for future investment opportunities. JEL Classifications:G31; H20.

published proceedings

  • The Accounting Review

author list (cited authors)

  • Guenther, D. A., Njoroge, K., & Williams, B. M.

citation count

  • 24

complete list of authors

  • Guenther, David A||Njoroge, Kenneth||Williams, Brian M

publication date

  • September 2020