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Discouraging Corporate Savings

  • Hwanki Brian Kim Baylor University
  • Woojin Kim Seoul National University
  • Mathias Kronlund University of Illinois at Urbana-Champaign
Corporations world over have amassed record levels of cash on their balance sheets. We study the effects of a unique tax reform in South Korea in 2015 that sought to stem the tide of corporate cash accumulation. Firms with shareholder’s equity above 50B Won, or that were part of larger business groups (Chaebol ), had to pay a sur-tax of 10% on any earnings above a threshold that were saved rather than invested or paid out to shareholders. Employing a difference-in-difference design, we find that the treated firms cut cash savings and instead direct earnings mainly towards new investments, resulting in stronger revenue growth, as well as towards higher wage increases and shareholder payouts. We find no evidence of reduced profitability, suggesting that these marginal investments were profitable. An event study analysis shows that shareholders reacted positively to firms being subject to the surtax, implying that shareholders viewed benefits from discouraging savings to outweigh the costs from a potentially higher tax bill. These findings suggest that firms were underinvesting and saving excessively prior to the tax change.

  • Hwanki Brian Kim
  • Woojin Kim
  • Mathias Kronlund
Corporations world over have amassed record levels of cash on their balance sheets. We study the effects of a unique tax reform in South Korea in 2015 that sought to stem the tide of corporate cash accumulation. Firms with shareholder’s equity above 50B Won, or that were part of larger business groups (Chaebol ), had to pay a sur-tax of 10% on any earnings above a threshold that were saved rather than invested or paid out to shareholders. Employing a difference-in-difference design, we find that the treated firms cut cash savings and instead direct earnings mainly towards new investments, resulting in stronger revenue growth, as well as towards higher wage increases and shareholder payouts. We find no evidence of reduced profitability, suggesting that these marginal investments were profitable. An event study analysis shows that shareholders reacted positively to firms being subject to the surtax, implying that shareholders viewed benefits from discouraging savings to outweigh the costs from a potentially higher tax bill. These findings suggest that firms were underinvesting and saving excessively prior to the tax change.
Corporate cash; savings; investment; natural experiment; tax