This article was downloaded by: [Moskow State Univ Bibliote]On: 04 December 2013, At: 01:43Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House,37-41 Mortimer Street, London W1T 3JH, UK

Applied Financial EconomicsPublication details, including instructions for authors and subscription information:http://www.tandfonline.com/loi/rafe20

The impact of double taxation on small firms' cashholdingsHui Di a & Steven Allen Hanke aa Department of Accounting & Finance , Indiana University–Purdue University Fort Wayne ,Fort Wayne , 46805 , USAPublished online: 15 Jul 2013.

To cite this article: Hui Di & Steven Allen Hanke (2013) The impact of double taxation on small firms' cash holdings, AppliedFinancial Economics, 23:16, 1349-1359, DOI: 10.1080/09603107.2013.818211

To link to this article: http://dx.doi.org/10.1080/09603107.2013.818211

PLEASE SCROLL DOWN FOR ARTICLE

Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) containedin the publications on our platform. However, Taylor & Francis, our agents, and our licensors make norepresentations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of theContent. Any opinions and views expressed in this publication are the opinions and views of the authors, andare not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon andshould be independently verified with primary sources of information. Taylor and Francis shall not be liable forany losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoeveror howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the use ofthe Content.

This article may be used for research, teaching, and private study purposes. Any substantial or systematicreproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in anyform to anyone is expressly forbidden. Terms & Conditions of access and use can be found at http://www.tandfonline.com/page/terms-and-conditions

The impact of double taxation on

small firms’ cash holdings

Hui Di* and Steven Allen Hanke

Department of Accounting & Finance, Indiana University–Purdue UniversityFort Wayne, Fort Wayne 46805, USA

Prior literature conjectures that double taxation has a negative impact on corpo-rate liquidity. However, there is a lack of empirical evidence for the proposition.By examining small publicly-traded C corporations, we find a negative relationbetween long-run cash effective tax rates and cash holdings. Such a tax impactoccurred before the reduction in double taxation in 2003 but not afterwards.Another unexplored issue is whether it is effective to enact double taxationreducing policies when economic conditions deteriorate. Our results reveal thatsuch policies should be made permanent instead of being employed only wheneconomic conditions deteriorate.

Keywords: cash holdings; small firms; double taxation; economic conditions

JEL Classification: G32; H25

I. Introduction

Australia and Canada have adopted tax policies that allowindividuals to offset their dividend taxes with a credit inaccordance with income taxes paid by the dividend-pay-ing corporation. Such policies eliminate, or at least lower,the double taxation of corporate earnings. In the UnitedStates, dividends and capital gains tax rates were substan-tially reduced subsequent to the legislation of the Jobs andGrowth Tax Relief Reconciliation Act (JAGTRRA) thatwas enacted for the 2003 tax year and partially extendedunder the American Taxpayer Relief Act of 2012. Theissue of double taxation remained relevant in the recentpresidential election debate.

Financial press articles (e.g., Paulson, 2007; Hubbard,2011) suggest unfavourable ramifications of taxing divi-dends and capital gains, including double taxation, hinder-ing investment in corporations and restricting economicgrowth. Academic research (e.g., Opler et al., 1999) alsoimplies that double taxation imposes a cost on corporateliquidity; however, there is no empirical evidence of sucha tax impact. Several studies (e.g., Bates et al., 2009) of

cash holdings focus on identifying the determinants ofsuch corporate liquid investments. Only a few studiesexamine the relation between firms’ tax status and cashholdings and present mixed results (Faulkender, 2002;Dhaliwal et al., 2011). Bates et al. (2009) show that inthe period 1980 to 2006, an average firm’s cash holdingswere more than 10% of its total assets. This statisticsuggests that it is important to obtain a better understand-ing of the tax implications for this substantial corporateasset. Our study aims to extend the line of research.

Myers and Majluf (1984) conjecture that, under informa-tion asymmetry, mispricing may cause firms to forgo pro-jects of positive net present value (NPV) unless they havesufficient cash to eliminate the need for external financing.Cash holdings are particularly valuable to small firms, giventhat they have a higher level of information asymmetryrelative to their large counterparts (Faulkender, 2002).Consistently, Opler et al. (1999) show that firms with themost cash holdings are small firms. Bates et al. (2009) alsofind that small firms have been increasing cash reserves at ahigher rate than large firms since 1980. Despite small firms’economic significance and high information asymmetry,

*Corresponding author. E-mail: dih@ipfw.edu

Applied Financial Economics, 2013Vol. 23, No. 16, 1349–1359, http://dx.doi.org/10.1080/09603107.2013.818211

© 2013 Taylor & Francis 1349

Dow

nloa

ded

by [

Mos

kow

Sta

te U

niv

Bib

liote

] at

01:

43 0

4 D

ecem

ber

2013

Faulkender’s is the only study that examines the determi-nants of such firms’ cash holdings. The prior study usesthe 1993 National Survey of Small Business Finance(NSSBF), in which firms are generally not publicly tradedand are much smaller than Compustat firms.1 Specifically,Faulkender reports that less than 2% of the NSSBF firms arepublicly traded and sales for the median firm in the 1993NSSBF (Compustat) are $1.17 million ($69 million).

When examining the impact of double taxation on cashholdings, Faulkender (2002) finds no significant relation-ship between them instead of a negative relationship that isoriginally expected. This surprising result was perceivedto be due to firms in the 1993 NSSBF data set havinglimited cash holdings, which are not large enough togenerate sufficient corporate investment income andhence lessen the impact of double taxation on the corpo-rate decision. To address the issue, we include in oursample the smaller firms listed on Compustat to ensurean adequate level of cash holdings. Furthermore, Dhaliwalet al. (2011) find a positive relationship between corporatetaxes and cash holdings and attribute this finding to rentextraction through complicated tax transactions. The rentextraction issue should be less problematic within oursample, given that small Compustat firms and their largecounterparts are significantly different in terms of taxcomplexity.

The passage of JAGTRRA induces a large decrease inthe level of double taxation, specifically through substan-tially lower dividend and capital gain taxes. If doubletaxation is important in corporate decisions on cash hold-ings, a reduction in double taxation results in lower taxpenalty for firms. We expect the impact of double taxationon cash holdings to be smaller following the enactment ofJAGTRRA. Therefore, we examine the relationshipbetween double taxation and cash holdings during thesubsample periods before and after JAGTRRA. The find-ing of a change in the impact of double taxation canprovide additional insights into how double taxation influ-ences corporate liquidity. Furthermore, firms’ access toexternal financing is subject to the condition of capitalmarkets. When examining cash holdings, we followFrank and Goyal (2011) to incorporate the industry-levelmarket condition into our pre- and post-JAGTRRA ana-lyses. Specifically, we separately analyse the relationshipbetween double taxation and cash holdings during goodtimes and bad times at the industry level before and afterJAGTRRA.

Consistent with prior research’s conjecture that doubletaxation imposes a cost on corporate liquidity, we find asignificant, negative relationship between corporateincome taxes and small firms’ cash holdings. Though thenegative tax impact existed before the passage of

JAGTRRA, we find no significant relationship betweencorporate taxation and cash holdings following the reduc-tion in the double taxation penalty, i.e. during the post-JAGTRRA period. This result provides additional supportthat our earlier finding is driven by the impact of doubletaxation. We also show that the negative impact of doubletaxation on corporate liquidity existed only during goodtimes in an industry before the passage of JAGTRRA.That is, tax issues become less important when a firm isfacing a struggling industry environment. Our results areconsistent with Frank and Goyal’s (2011) finding of smallfirms being less likely to issue equity during bad times.Regardless of the tax implications, small firms strive tomaintain adequate internal funding when their access toexternal financing is limited during the downturns. Ourfindings remain similar after controlling for taxcomplexity.

Our study contributes to the existing literature in severalways. First, this is the first study to provide empiricalevidence for double taxation having a negative impacton small firms’ liquidity levels. Second, we show thatsuch a tax impact can be nullified by a legislation (e.g.,JAGTRRA) that lowers tax rates imposed on dividendsand capital gains. Third, our results indicate that suchpolicies should be made permanent instead of beingemployed only when economic conditions deteriorate.Our findings can be of interest to policy makers who areconcerned with corporate liquidity.

The remainder of this article proceeds as follows.Section II reviews prior research and discusses ourresearch questions, while Section III presents the researchmethodology. Section IV discusses the results. Section Vprovides the conclusions.

II. Prior Literature and HypothesisDevelopment

Cash holdings can be an important source of internalfinancing for firms’ investment opportunities, especiallywhen the access to external capital markets is limited.However, facing the large tax penalty on high cash hold-ings, firms may take actions to reduce cash holdings.Managers can distribute cash to shareholders throughdividend payouts and share repurchases. Alternatively,managers may pursue mergers that destroy shareholdervalue to diversify their personal employment risk(Amihud and Lev, 1981). Anderson and Reeb (2003)also show that small firms with founding family owner-ship distribute wealth through related-party transactionsand excessive compensation.

1 The NSSBF survey was conducted by the Board of Governors of the Federal Reserve System and the US Small Business Association in1987, 1993, 1998 and 2003. The survey has been discontinued.

1350 H. Di and S. A. Hanke

Dow

nloa

ded

by [

Mos

kow

Sta

te U

niv

Bib

liote

] at

01:

43 0

4 D

ecem

ber

2013

Different than other organizational forms, C corpora-tions are subject to double taxation that may incur costs ontheir cash holdings. These firms pay corporate income taxon the income from investing the cash, for example, inmoney markets or short-term bonds. Shareholders thenpay individual income tax on their dividend income.Meanwhile, short-term investment opportunities are alsoaccessible to investors and the tax on earned income canbe lower if shareholders invest the cash distribution ontheir own. This raises the question of whether the doubletaxation penalty on corporate earnings influences C cor-porations’ decisions on cash holdings.

Faulkender (2002) conjectures that C corporations’ taxstatus has a negative impact on cash holdings. The authorutilizes the taxation differences between C corporationsand S corporations to examine such double taxationimpact within the 1993 NSSBF data set.2 Despite thetheoretical impact of double taxation, Faulkender findsno evidence that C corporations’ cash holdings are sig-nificantly lower than S corporations’. The result is attrib-uted to the overall low cash holdings of the 1993 NSSBFsample; as a result, the tax on interest income would not besignificant enough to have a noticeable influence on cashholdings. To address the issue, we examine a sample ofrelatively small C corporations from Compustat. Themean cash holdings (50% of sales) of these firms aremuch higher than those (7% of sales) of Faulkender’ssample from the 1993 NSSBF.

A more recent study on double taxation’s impact oncash holdings is that of Dhaliwal et al. (2011), which isbased on publicly-traded firms in Compustat between1985 and 2008.3 This prior study documents a positiverelationship between firms’ cash effective tax rates andcash holdings. The authors suggest that managers extractrent when firms engage in complicated tax avoidancepractices to lower effective tax rates. The lack of evidencefor the negative relationship between double taxation andcash holdings may be due to Dhaliwal et al.’s sampleincluding Compustat firms of various sizes. Relative tolarger firms, smaller firms are most likely involved withless complex operations and thus have lower levels of taxcomplexity. The differences among Compustat firms sug-gest that it is still an unanswered question whether the rentextraction through complicated tax transactions nullifiesthe negative impact of double taxation on cash holdingsfor smaller Compustat firms. We compare the levels of taxcomplexity in larger and smaller Compustat firms usingHogan and Noga’s (2012) proxies: capital intensity, acqui-sitions, net operating loss and foreign operations. There is

evidence that smaller Compustat firms have significantlylower tax complexity than their larger counterparts.Accordingly, we do not expect that controlling for taxcomplexity will significantly alter the negative impact ofdouble taxation on cash holdings for smaller Compustat Ccorporations (hereafter small firms).

The passage of JAGTRRA during our sample periodprovides a unique setting to further test our expectation.JAGTRRA reduced the maximum federal individual taxrate on dividends from 35% to 15% and the maximum taxrate on capital gains from 20% to 15%, beginning in 2003.Besides its impact on corporate payouts (e.g., Chetty andSaez, 2005), prior research shows that there are changes inseveral nonpayout corporate policies around JAGTRRA,such as a decrease in the likelihood to issue debt relative toequity (Dhaliwal et al., 2007), a decrease in firm leverage(Lin and Flannery, 2012) and an increase in capital expen-ditures (Campbell et al., 2012). As the passage ofJAGTRRA induces a reduction in the double taxationpenalty, it is reasonable to expect a smaller tax impact onsmall firms’ cash holdings following JAGTRRA. In thiscase, we separate our sample period into the pre- and post-JAGTRRA subsample periods and perform subsampleanalyses of the relationship between effective tax ratesand cash holdings. The pre-JAGTRRA period is from1994 to 2002 and the post-JAGTRRA period is from2003 to 2011.

Bernanke and Gertler (1989) propose that agency costsof investment vary with macroeconomic fluctuations; spe-cifically, the costs are higher in recessions than in expan-sions. This indicates that external financing becomes moreexpensive during poor capital market conditions. A morerecent study of Opler et al. (1999) shows that large firmshave greater access to the capital markets and, thus, holdless liquid assets. These two studies, when combined,suggest that small firms should be more reliant on cashholdings for funding, especially during the market down-turns, given that they may not have similar access toexternal financing as large firms. We, thus, argue that anexamination of cash holdings should not be in isolationfrom capital market conditions.

In a study of asset liquidity, Shleifer and Vishny (1992)emphasize that the liquidation value of a firm’s assets isdirectly subject to the funding availability of its industrypeers. When a firm in financial distress liquidates itsassets, other firms in the industry may also face creditconstraints and, thus, be unable to purchase the assets.Thus, the possible buyers are industry outsiders that sup-press asset price. Furthermore, Frank and Goyal (2011)

2 S corporation earnings are subject to a single level of taxation. Each year, earnings are allocated to shareholders based on theirpercentage of ownership in the firm. The allocated earnings are then taxed at shareholders’marginal tax rate. S corporations are subject toa single level of taxation due to the satisfaction of several requirements such as having a limited number of shareholders.3 Several studies examine the impact of repatriation taxes on cash holdings (e.g., Foley et al., 2007).We do not include these studies in ourdiscussion because our examination of cash holdings is closely tied to that of Bates et al. (2009), that does not find cash ratios beingimpacted by foreign income.

The impact of double taxation on small firms’ cash holdings 1351

Dow

nloa

ded

by [

Mos

kow

Sta

te U

niv

Bib

liote

] at

01:

43 0

4 D

ecem

ber

2013

find that various factors documented in prior literature asbeing important in financing policies have time-varyingimpacts during good times and bad times at the industrylevel. For example, the prior study shows that small firmshave a higher (lower) likelihood of issuing equity in good(bad) times. Accordingly, our study follows Frank andGoyal and determines good times and bad times at theindustry level. That is, we define a firm to be in an industryexperiencing good (bad) times if the industry medianmarket-to-book ratio is in the top (bottom) 33 percentileof the distribution of industry median market-to-bookratios during our sample period.

We hypothesize that the impact of double taxation onsmall firms’ cash holdings varies across industry-levelgood and bad times. On the one hand, double taxationmay have more importance in small firms’ cash holdingsduring bad times. With high cash holdings, these firms canincur high tax liability at the corporate level on investmentincome. Such tax liability occupies firms’ cash that insteadcan be available for distribution to shareholders. Smallfirms, therefore, may lower their cash holdings to reducethe tax liability on investment income to maximize share-holder value during bad times. On the other hand, smallfirms may be more concerned about surviving bad timesthan paying a higher tax liability on the investment incomeat the corporate level. By this logic, these firms’ cashholdings during bad times will not be affected by theirpotential tax liability, suggesting a weaker impact of dou-ble taxation on cash holdings during bad times. This con-jecture is consistent with Frank and Goyal’s (2011) findingthat small firms are more likely to shy away from theequity market during bad times. To obtain more insightsinto the two opposing theories, we further analyse our pre-and post-JAGTRRA subsamples during good times andbad times.

III. Research Methodology

Sample

We obtained our sample from Compustat during the per-iod 1994 to 2011.4 Beginning in 1994 ensures no changesin tax rates across corporation income tax brackets overthe sample period. Our sample also allows for an equaldivision between pre- and post-JAGTRRA periods.Among all available observations in Compustat,

we focus on nonfinancial and nonutility firms incorporatedin the United States.5 We require positive values for totalassets (Compustat item #6) as well as sales (item #12). Theobservations are excluded from the sample if cash andmarketable securities (item #1) are larger than total assets.Considering the difference in the taxation of corporate andnoncorporate firms, we exclude noncorporate firms whoseowners’ income is subject to a single level of taxation.Similar to Dyreng et al. (2008), a firm is defined to benoncorporate with its name ending with ‘LP’ or containing‘TRUST’ or with its six-digit CUSIP ending with ‘Y’ or‘Z’. We are interested in smaller firms that are in the lowestquartile of total assets.6 With data available on all of thevariables required for our analyses, the final sample con-sists of 11 184 firm-years from 1994 to 2011. In thesubsample analysis, there are 6684 firm-years in the pre-JAGTRRA subsample and 4500 firm-years in the post-JAGTRRA subsample.

Regression model

When examining the impact of double taxation on firms’cash policy, we follow the Bates et al. (2009) model andinclude the variable of interest, cash effective rate, as anexplanatory variable. The regression model used in ourtests is as follows:

CHEi;t

ATi;t¼ β0 þ β1CashETR5i;t þ β2M=Bi;t þ β3ln ATi;t

� �

þ β4FCFi;t

ATi;tþ β5

NWCi;t

ATi;tþ β6

CAPXi;t

ATi;t

þ β7Leveragei;t þ β8IndustrySigmai;t

þ β9Dividendi;t þ β10XRDi;t

SALEi;t

þ β11AQCi;t

ATi;tþ Year Dummies

þ Industry Fixed Effects

þ εi;t ð1Þ

Corporate cash holdings are defined as CHE/AT, whichis cash and market equivalent divided by total assets.Bates et al. suggest that this measure of cash holdingshelps mitigate the problem of extreme outliers occur-ring to an alternative measure of cash-to-net assetsratio when a sample includes firms with assets smallerthan $100 million. Given that 90% of our sample

4 For comparability with Dhaliwal et al. (2011), we extend the sample period to start in 1985. Our results remain qualitatively similar forthe extended sample.5 Financial firms (SIC 6000–6999) and utilities (SIC 4900–4999) are excluded from the sample.6 Though our definition of small firms is arbitrary, it closely reflects the definition of having less than 500 employees commonly used inthe studies of small businesses. For our sample, the mean (median) number of employees is 482 (212). In addition, our sample has mean(median) sales of $62.23 million ($37.54 million), consistent with Graham and Harvey’s (2001) sales cut-offs of $100 million for verysmall firms. To ensure the robustness of our results, we alternatively define small firms as those in the lowest quartile of total sales. Theresults of our study are essentially the same.

1352 H. Di and S. A. Hanke

Dow

nloa

ded

by [

Mos

kow

Sta

te U

niv

Bib

liote

] at

01:

43 0

4 D

ecem

ber

2013

observations have total assets lower than $100 million,our choice of dependent variable is most appropriatefor the study.7

We use the 5-year cash effective rate (CashETR5) tocapture the long-run impact of double taxation on a firm’scash holding. Utilizing a long-run effective tax ratereduces the impact of temporary book-tax differencesand temporary delays in tax payments during the resolu-tion of disputes with tax authorities. As such, a long-runeffective tax rate allows a better match between taxes andthe income that generates such liabilities.8 As shown inAyers et al. (2010), tax measure is computed as the sum ofcash taxes paid (item #317) for firm i from t–5 to t–1,divided by the sum of the difference between pre-tax bookincome (item #170) and special items (item #17) duringthe 5-year period. To avoid negative values for the taxvariable, we require positive values for the denominator.For missing cash taxes paid, we use the difference betweentotal taxes (item #16) and deferred taxes (item #50). Formissing special items, we set it equal to zero.

We follow Bates et al.’s (2009) definitions of controlvariables. M/B captures firms’ investment opportunitiesand is computed as total assets minus the book value ofequity plus the market value of equity (item #6 − #60 +#199 × #25), divided by total assets. The firm size ismeasured by ln(AT), the natural logarithm of total assets.A positive relation is expected between cash flow and cashholdings. The impact of cash flow is controlled for throughFCF/AT, which is the operating income before deprecia-tion minus interest, taxes and dividends (item #13 – #15 –#16 – #21), divided by total assets.NWC/AT represents thesubstitute for cash holdings and is the ratio of net workingcapital (item #179), net of cash, to total assets.CAPX/AT isthe ratio of capital expenditures to total assets. There is noclear directional prediction regarding the relation betweenthe variable and cash holdings since it can proxy for eitherthe collateral level that influences firms’ debt capacity orinvestment opportunities that curb firms’ cash savings.Similarly, Leverage can be either positively or negativelyrelated to cash holdings. This variable is total debt, thesum of long-term debt and debt in current liability (item #9+ #34), divided by total assets. The measure of cash flowrisk, IndustrySigma, is the mean standard deviation ofFCF/AT during a 10-year period at the industry levelrepresented by the two-digit SIC code. We require atleast three observations available for FCF/AT from t–10to t–1. Firms with a high level of cash flow risk are

expected to hold more cash. Dividend is a dummy vari-able, which is equal to one if a firm makes the dividendpayout (item #21) during a year. XRD/SALE is R&Dexpense (item #46) divided by sales; the expense is setequal to zero when it is missing. Similar to capital expen-diture, acquisition activity is a substitute for cash. AQC/ATis the ratio of acquisition expenditure (item #129) to totalassets.

Dhaliwal et al. (2011) imply that their finding of apositive relation between annual cash effective tax ratesand cash holdings may be attributed to tax complexity. Wealso find that there is a significant difference in tax com-plexity between larger and smaller Compustat firms. Forour sample of small firms, we conjecture that as these firmsgrow, they may engage in more complex operations andanticipate higher levels of tax complexity. In this case, weextend the Bates et al. (2009) model to include tax com-plexity variables. The extended model is as follows:

CHEi;t

ATi;t¼ β0 þ β1CashETR5i;t þ β2M=Bi;t þ β3ln ATi;t

� �

þ β4FCFi;t

ATi;tþ β5

NWCi;t

ATi;tþ β6

CAPXi;t

ATi;t

þ β7Leveragei;t þ β8IndustrySigmai;t

þ β9Dividendi;t þ β10XRDi;t

SALEi;tþ β11

AQCi;t

ATi;t

þ β12PPENTi;tATi;t

þ β13NOLi;t þ β14FOREIGNi;t

þ Year Dummiesþ Industry Fixed Effects

þ εi;t ð2Þ

We follow Hogan and Noga (2012) to define the threeadditional variables for tax complexity.9 Consistent withour long-run tax measure, the tax complexity variablesare estimated during the same 5-year period of t–5 tot–1. Capital intensity (PPENT/AT) is the mean ratioof net property, plant and equipment (item #8) to totalassets during the time period. Net operating loss (NOL)is the sum of the number of years in which tax lossescarryforward (item #52) occurs over the 5-year periodand foreign operations (FOREIGN) is the sum of thenumber of years in which the firm reports foreign incometaxes (item #412).

To ensure a more interpretable measure for CashETR5,we follow Dyreng et al. (2008) and winsorize the variable

7 Our results are qualitatively similar when examining the Dittmar and Mahrt-Smith (2007) definition of the cash-to-net assets measure,the natural logarithm of (1 + CHE/(AT – CHE)), where CHE/(AT – CHE) is winsorized at one.8 Dyreng et al. (2008) present a more complete discussion of the advantages of using a long-run measure of effective tax rates rather thanan annual measure.9 Hogan and Noga (2012) include a total of six tax complexity variables. However, the prior study documents that four of these variablesconsistently have statistical significance in long-term regression analyses and they are capital intensity (PPENT/AT), acquisitions, netoperating loss (NOL) and foreign operations (FOREIGN). Since there is an acquisitions-related explanatory variable in our regressionmodel, we include only PPENT/AT, NOL and FOREIGN to control for tax complexity.

The impact of double taxation on small firms’ cash holdings 1353

Dow

nloa

ded

by [

Mos

kow

Sta

te U

niv

Bib

liote

] at

01:

43 0

4 D

ecem

ber

2013

at zero and one. Except for Leverage, nontaxation contin-uous variables at the firm level are winsorized at the topand the bottom 1%; similar to Bates et al. (2009),Leverage is winsorized at zero and one. Our regressionmodel also controls for year and industry effects. Theindustry effects are determined based on two-digit SICcodes. Consistent with Dhaliwal et al. (2011), the hetero-scedasticity-robust SE estimation is adjusted for firmclustering.

IV. Results

Descriptive statistics

Panel A of Table 1 reports the descriptive statistics for ourfull sample from 1994 to 2011 and Panel B reports for thepre- and post-JAGTRRA subsamples. For the full sample,the mean (median) value of total assets is $43.65 million($30.532 million). Both statistics are much smaller than

Table 1. Descriptive statistics

Panel A: Descriptive statistics of full sample

Variable Mean 1st Quartile Median 3rd Quartile

Total Assets ($M) 43.650 14.724 30.532 55.127CHE/AT 0.187 0.030 0.113 0.292CashETR5 0.299 0.090 0.272 0.401M/B 1.761 0.976 1.320 2.015FCF/AT 0.049 0.013 0.069 0.119NWC/AT 0.164 0.024 0.170 0.309CAPX/AT 0.055 0.015 0.033 0.067Leverage 0.160 0.001 0.100 0.264IndustrySigma 0.653 0.131 0.228 0.492XRD/SALE 0.039 0.000 0.000 0.047AQC/AT 0.015 0.000 0.000 0.000PPENT/AT 0.228 0.082 0.167 0.315NOL 1.236 0.000 0.000 2.000FOREIGN 0.775 0.000 0.000 0.000

Panel B: Comparison of means for pre- and post-JAGTRRA subsamples

Variable Pre-JAGTRRA subsample Post-JAGTRRA subsample Difference in means (post − pre)

Total Assets ($M) 26.178 69.603 43.425***CHE/AT 0.176 0.203 0.027***CashETR5 0.311 0.281 –0.030***M/B 1.731 1.805 0.074***FCF/AT 0.042 0.059 0.017***NWC/AT 0.173 0.152 –0.021***CAPX/AT 0.060 0.046 –0.014***Leverage 0.178 0.134 –0.044***IndustrySigma 0.234 1.276 1.042***XRD/SALE 0.041 0.035 –0.006***AQC/AT 0.015 0.016 0.001PPENT/AT 0.232 0.223 –0.009**NOL 1.035 1.535 0.500***FOREIGN 0.562 1.092 0.530***

Notes: This table provides descriptive statistics for our sample of nonfinancial and nonutility small Compustat firms that wereincorporated in the United States. The full sample includes 11 184 firm-year observations from 1994 to 2011 and it is further examinedin two subsample periods of 1994 to 2002 (pre-JAGTRRA) and 2003 to 2011 (post-JAGTRRA). Total Assets is in millions of dollars.CHE/AT is the ratio of cash andmarket equivalent to total assets.CashETR5 is the 5-year cash effective rate that is computed as the sum ofcash taxes paid divided by the sum of the difference between pre-tax book income and special items during the period of t–5 to t–1.M/B istotal assets minus the book value of equity plus the market value of equity, divided by total assets. FCF/AT is the operating income beforedepreciation minus interest, taxes and dividends, divided by total assets. NWC/AT is the ratio of net working capital, net of cash, to totalassets. CAPX/AT is the ratio of capital expenditures to total assets. Leverage is total debt, divided by total assets. IndustrySigma is themean SD of FCF/ATat the industry level represented by the two-digit SIC code. XRD/SALE is the ratio of R&D expense to sales. AQC/ATis the ratio of acquisition expenditure to total assets. PPENT/AT is the mean of net property, plant and equipment, divided by total assets,for the period of t–5 to t–1. During the 5-year period of t–5 to t–1, NOL is the sum of the years with the tax loss carryforward andFOREIGN is the sum of the years with foreign income taxes. We use t-tests for the difference in means.** and *** indicate statistical significance at 5% and 1%, respectively.

1354 H. Di and S. A. Hanke

Dow

nloa

ded

by [

Mos

kow

Sta

te U

niv

Bib

liote

] at

01:

43 0

4 D

ecem

ber

2013

those of Dhaliwal et al.’s (2011) sample (mean = $1154.01million, median = $185.16 million), reflecting our focuson small firms. The mean value of CHE/AT is 0.187 andthe median value is 0.113. This variable corresponds to theranges of means and medians reported in Bates et al.(2009) for all Compustat firms during the sample periodof 1994 to 2006. The mean and median values ofCashETR5 are 0.299 and 0.272, respectively, which arecomparable to the values for Dyreng et al.’s (2008) sampleincluding Compustat firms of various sizes. All threevariables for tax complexity, PPENT/AT, NOL andFOREIGN, are lower than the statistics shown in Hoganand Noga (2012) at both mean and median levels. Thisimplies that small firms engage in less complex operatingactivities.

When further examining the pre- and post-JAGTRRAsubsamples (Panel B of Table 1), we find significantdifferences between the two sample periods except forAQC/AT. Firms become larger in the post-JAGTRRAperiod. Though there is a significant increase in TotalAssets subsequent to JAGTRRA, the mean value of$69.603 million in total assets is still considerably smallerthan the mean value of $1154 million in Dhaliwal et al.(2011). We also observe significantly higher cash holdingsat the mean level in the post-JAGTRRA period. This trendin CHE/AT is consistent with Bates et al.’s (2009) findingof a more pronounced growth in the average cash ratio forsmaller firms. Relative to the pre-JAGTRRA subsample,CashETR5 decreases by 0.03 after the enactment ofJAGTRRA. There is mixed evidence of a change in taxcomplexity during the post-JAGTRRA period. That is,among the three variables for tax complexity, we findsignificant increases in NOL and FOREIGN while a sig-nificant decrease is found in PPENT/AT.

The impact of double taxation on cash holdings

Column (1) of Table 2 presents the results of our regres-sion analysis for the full sample period of 1994 to 2011.The variable of interest, CashETR5, has a negative coeffi-cient with a marginal significance level of 0.062, indicat-ing that small firms have lower cash holdings as theireffective tax rate increases. Dhaliwal et al. (2011) suggestthat firms’ tax complexity level impacts their cash hold-ings. Accordingly, we incorporate three tax complexitymeasures from Hogan and Noga (2012) as additionalexplanatory variables in our model and re-analyse thefull sample. We report our regression results after control-ling for tax complexity in Column (2) of Table 2.CashETR5 remains negatively related to cash holdingsand there is an increase in its statistical significance. Ourresults provide some evidence for the conjecture thatdouble taxation suppresses corporate liquidity (e.g.,Opler et al., 1999).

Some may argue that our results show the impact ofcorporate income taxation rather than double taxation oncash holdings because the tax measure does not reflect thetaxation on investors’ income. We, therefore, divide theentire sample into pre- and post-JAGTRRA subsamples.Our aim is to examine whether there is a change in theimpact of CashETR5 following a substantial reduction indouble taxation under JAGTRRA. The results of suchanalyses are reported in Columns (3) to (6) of Table 2.CashETR5 is not significantly related to cash holdingsafter JAGTRRA while it has a negative coefficient at the1% significance level before JAGTRRA. That is, thenegative tax impact disappears with lower double taxa-tion. This finding provides additional support for the pro-position that small firms reduce cash holdings when facinghigher levels of double taxation. Our results remain thesame after controlling for tax complexity.

For our full sample (Columns (1) and (2) inTable 2), most of the explanatory variables that arenot related to taxation have similar directional relationwith cash holdings as documented in Bates et al.(2009). M/B and XRD/Sale have positive coefficientsat the 1% significance level, suggesting that smallfirms with better investment opportunities and growthpotentials hold more cash. Conversely, ln(AT), NWC/AT, CAPX/AT, Leverage and AQC/AT are negativelyrelated to cash holdings at the significance level of5% or higher. These results indicate that small firmstend to hold less cash when they are larger and morefinancially leveraged, have more cash-substitutingassets and collateral assets and engage in more acqui-sition activities. When applying Bates et al.’s model toexamine small firms, FCF/AT, IndustrySigma andDividends have no significant impact on cash holdings.However, the coefficient on FCF/AT becomes statisti-cally significant in the alternative model specificationthat includes the control variables for tax complexity.

In the comparison of pre- and post-JAGTRRA subsam-ples, we find that nontaxation explanatory variables,except for ln(AT) and FCF/AT, are not associated with asubstantial change in their explanatory power for cashholdings. The coefficient on ln(AT) becomes statisticallysignificant for the post-JAGTRRA subsample while beinginsignificant for the pre-JAGTRRA subsample. This resultmay be related to the large increase in total assets duringour sample period. In contrast, FCF/AT loses its explana-tory power during the post-JAGTRRA period and such achange only occurs when tax complexity variables areincluded in the model specification.

Among the control variables for tax complexity,PPENT/AT and NOL are negatively related to cash hold-ings, at the significance level of 1%. Since they are long-run variables, our results suggest that firms with higherlevels of tax complexity in the long term tend to hold less

The impact of double taxation on small firms’ cash holdings 1355

Dow

nloa

ded

by [

Mos

kow

Sta

te U

niv

Bib

liote

] at

01:

43 0

4 D

ecem

ber

2013

cash. The size and significance level of the coefficients onthese two variables are similar between the pre- and post-JAGTRRA subsamples. FOREIGN does not have signifi-cant explanatory power for cash holding. One potentialexplanation for this result is that small firms are less likelyto have extensive foreign operations.

The impact of double taxation on cash holdings in goodtimes versus bad times

Tax policy often receives more attention during economicdownturns since policy-makers face added pressure to findways to stabilize or stimulate the economy and believe thatchanges in tax policy can provide a solution. To gain

Table 2. The impact of double taxation on cash holdings

Full sample Pre-JAGTRRA subsample Post-JAGTRRA subsample

Model (1) (2) (3) (4) (5) (6)

Intercept 0.442*** 0.531*** 0.373*** 0.462*** 0.474*** 0.562***(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

CashETR5 –0.015* –0.018** –0.029*** –0.033*** 0.009 0.006(0.062) (0.022) (0.001) (0.000) (0.486) (0.619)

M/B 0.017*** 0.015*** 0.016*** 0.014*** 0.020*** 0.017***(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

ln(AT) –0.008** –0.008** –0.002 –0.003 –0.014*** –0.013**(0.034) (0.039) (0.656) (0.483) (0.005) (0.011)

FCF/AT 0.019 0.053*** 0.012 0.046** 0.015 0.045(0.280) (0.003) (0.565) (0.033) (0.615) (0.113)

NWC/AT –0.326*** –0.355*** –0.310*** –0.338*** –0.353*** –0.380***(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

CAPX/AT –0.554*** –0.428*** –0.511*** –0.425*** –0.646*** –0.447***(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Leverage –0.488*** –0.457*** –0.483*** –0.452*** –0.511*** –0.481***(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

IndustrySigma 0.000 0.001 0.008 0.007 0.001 0.001(0.757) (0.694) (0.380) (0.423) (0.538) (0.708)

Dividend 0.006 0.008 0.003 0.005 0.008 0.011(0.419) (0.240) (0.705) (0.576) (0.453) (0.289)

XRD/SALE 0.546*** 0.533*** 0.466*** 0.463*** 0.647*** 0.609***(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

AQC/AT –0.348*** –0.381*** –0.289*** –0.326*** –0.454*** –0.470***(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

PPENT/AT –0.185*** –0.158*** –0.218***(0.000) (0.000) (0.000)

NOL –0.007*** –0.009*** –0.006***(0.000) (0.000) (0.005)

FOREIGN –0.003 –0.003 –0.003(0.133) (0.187) (0.231)

Year Dummies Yes Yes Yes Yes Yes YesIndustry Fixed Effects Yes Yes Yes Yes Yes YesN 11 184 11 184 6684 6684 4500 4500Adjusted R2 0.454 0.473 0.461 0.477 0.459 0.482

Notes: This table reports the results of OLS regressions in which the dependent variable is cash holdings. We examine two modelspecifications; Columns (1), (3) and (5) present the results without controlling for tax complexity while Columns (2), (4) and (6) presentthe results with controlling for tax complexity. For each model specification, we first focus on the full sample and then separately examinetwo subsample periods of 1994 to 2002 (pre-JAGTRRA) and 2003 to 2011 (post-JAGTRRA).CashETR5 is the 5-year cash effective ratethat is computed as the sum of cash taxes paid divided by the sum of the difference between pre-tax book income and special items duringthe period of t–5 to t–1.M/B is total assets minus the book value of equity plus the market value of equity, divided by total assets. ln(AT) isthe natural logarithm of total assets. FCF/AT is the operating income before depreciation minus interest, taxes and dividends, divided bytotal assets. NWC/AT is the ratio of net working capital, net of cash, to total assets. CAPX/AT is the ratio of capital expenditures to totalassets. Leverage is total debt, divided by total assets. IndustrySigma is the mean SD of FCF/AT at the industry level represented by thetwo-digit SIC code.Dividend is a dummy variable that is equal to one if a firm makes the dividend payout during a year. XRD/SALE is theratio of R&D expense to sales. AQC/AT is the ratio of acquisition expenditure to total assets. PPENT/AT is the mean of net property, plantand equipment, divided by total assets, for the period of t–5 to t–1. During the 5-year period,NOL is the sum of the years with the tax losscarryforward and FOREIGN the sum of the years with foreign income taxes. The SE estimation is robust for heteroscedasticity with anadjustment for firm clustering. p-Values are reported in parentheses.*, ** and *** indicate statistical significance at 10%, 5% and 1%, respectively.

1356 H. Di and S. A. Hanke

Dow

nloa

ded

by [

Mos

kow

Sta

te U

niv

Bib

liote

] at

01:

43 0

4 D

ecem

ber

2013

insights on whether lowering double taxation will helpimprove small firms’ cash holdings in economic down-turns, we separately analyse the relation betweenCashETR5 and cash holdings in good times and badtimes for both pre- and post-JAGTRRA subsamples.Table 3 presents the results of comparisons in the tax effect

for good times versus bad times. For simplicity, we onlyreport the results based on the model specification thatincludes controls for tax complexity.

On the one hand, we find that there is a change in theimpact of CashETR5 on cash holdings in good times asdouble taxation becomes lower after the enactment of

Table 3. The impact of double taxation on cash holdings in good times versus bad times

Pre-JAGTRRA Post-JAGTRRA

Model Good times Bad times Good times Bad times

Intercept 0.676*** 0.338*** 0.487*** 0.392***(0.000) (0.000) (0.000) (0.000)

CashETR5 –0.052*** –0.018 0.014 0.017(0.000) (0.214) (0.388) (0.524)

M/B 0.015*** 0.010*** 0.016*** 0.017**(0.000) (0.008) (0.000) (0.034)

ln(AT) –0.003 –0.000 –0.015** –0.013*(0.690) (0.986) (0.012) (0.084)

FCF/AT 0.062* 0.044 0.027 0.061(0.086) (0.244) (0.502) (0.253)

NWC/AT –0.412*** –0.259*** –0.433*** –0.371***(0.000) (0.000) (0.000) (0.000)

CAPX/AT –0.543*** –0.342*** –0.524*** –0.426***(0.000) (0.000) (0.000) (0.000)

Leverage –0.516*** –0.405*** –0.459*** –0.515***(0.000) (0.000) (0.000) (0.000)

IndustrySigma 0.035 0.003 0.003 –0.004(0.308) (0.838) (0.276) (0.507)

Dividend 0.002 –0.000 0.013 0.015(0.875) (0.999) (0.264) (0.345)

XRD/SALE 0.467*** 0.433*** 0.609*** 0.747***(0.000) (0.000) (0.000) (0.000)

AQC/AT –0.454*** –0.280*** –0.504*** –0.368***(0.000) (0.000) (0.000) (0.000)

PPENT/AT –0.118*** –0.149*** –0.216*** –0.207***(0.000) (0.000) (0.000) (0.000)

NOL –0.016*** –0.002 –0.006** –0.005(0.000) (0.522) (0.017) (0.108)

FOREIGN –0.007** –0.002 –0.002 –0.004(0.023) (0.575) (0.404) (0.249)

Year Dummies Yes Yes Yes YesIndustry Fixed Effects Yes Yes Yes YesN 2410 1718 2048 743Adjusted R2 0.514 0.452 0.495 0.471

Notes: This table reports OLS regression results for good times versus bad times comparisons in the tax effect. Good times (bad times) aredetermined by whether the industry median market-to-book ratio is in the top (bottom) 33 percentile of the distribution of industry medianmarket-to-book ratios during our sample period. The dependent variable is cash holdings. The pre-JAGTRRA period is from 1994 to2002 and the post-JAGTRRA period is from 2003 to 2011.CashETR5 is the 5-year cash effective rate that is computed as the sum of cashtaxes paid divided by the sum of the difference between pre-tax book income and special items during the period of t–5 to t–1.M/B is totalassets minus the book value of equity plus the market value of equity, divided by total assets. ln(AT) is the natural logarithm of total assets.FCF/AT is the operating income before depreciation minus interest, taxes and dividends, divided by total assets. NWC/AT is the ratio ofnet working capital, net of cash, to total assets. CAPX/AT is the ratio of capital expenditures to total assets. Leverage is total debt, dividedby total assets. IndustrySigma is the mean SD of FCF/AT at the industry level represented by the two-digit SIC code. Dividend is adummy variable that is equal to one if a firm makes the dividend payout during a year. XRD/SALE is the ratio of R&D expense to sales.AQC/AT is the ratio of acquisition expenditure to total assets. PPENT/AT is the mean of net property, plant and equipment, divided bytotal assets, for the period of t–5 to t–1. During the 5-year period, NOL is the sum of the years with the tax loss carryforward andFOREIGN the sum of the years with foreign income taxes. The SE estimation is robust for heteroscedasticity with an adjustment forfirm clustering. p-Values are reported in parentheses.*, ** and *** indicate statistical significance at 10%, 5% and 1%, respectively.

The impact of double taxation on small firms’ cash holdings 1357

Dow

nloa

ded

by [

Mos

kow

Sta

te U

niv

Bib

liote

] at

01:

43 0

4 D

ecem

ber

2013

JAGTRRA. The coefficient on CashETR5 is significantlynegative prior to JAGTRRA, while becoming insignifi-cant afterwards. On the other hand, CashETR5 is notsignificantly related to cash holdings in bad times, regard-less of before or after JAGTRRA. Our results reveal thatthe strategy to enact tax-reducing policies only after eco-nomic conditions have deteriorated may not effectivelyhelp improve the corporate liquidity level of small firms.Rather, our study provides support for maintaining lowdouble taxation policies during good times. This may helpalleviate corporate liquidity issues among small firms. Thedifference in the tax impact on cash holdings betweengood and bad times are generally consistent with Frankand Goyal’s (2011) finding that small firms are less likelyto issue equity in bad times. Specifically, small firms mayundertake actions regarding their corporate liquidity tosurvive bad times regardless of the potential implicationsof double taxation on shareholders’ long-term wealth.

V. Conclusion

For small publicly traded C corporations, we document asignificant negative relation between long-run cash effec-tive tax rates and cash holdings. During our sample period,the double taxation penalty becomes notably lower sub-sequent to the passage of JAGTRRA. A further examina-tion of pre- and post-JAGTRRA subsamples shows thatsuch a tax impact no longer exists after the enactment ofJAGTRRA. Our findings provide evidence for the con-jecture that double taxation imposes a cost on corporateliquidity. In addition, we find that the negative relationbetween tax rates and cash holdings occurs only in goodtimes before the passage of JAGTRRA.

Our study can be of interest to policy-makers. Weprovide empirical evidence that the passage ofJAGTRRA alleviates the unfavourable impact of doubletaxation on corporate liquidity. Fresard (2010) documentsthat larger cash balances enhance firms’ ability to competewith industry rivals for market share. Accordingly, policymakers should consider the policies that can lower taxpenalties in the corporate form to nurture their competitiveadvantages in both domestic and international markets.Our finding of double taxation’s negative impact on cashholdings in good times prior to the passage of JAGTRRAsuggests that double taxation-decreasing policies shouldbe maintained even during good times. This allows cor-porations to build more cash reserves in the event thateconomic conditions deteriorate, which is supported byCampbell et al.’s (2008) finding that larger cash holdingsdecrease a firm’s probability of going bankrupt. Moreover,since we do not find the evidence of taxation being asignificant determinant of cash holdings during badtimes, the enactment of such tax policies may not be a

remedy for improving firms’ liquidity in market down-turns. Overall, our study provides support for tax policiesthat lower double taxation and demonstrates that thesepolicies can be beneficial if they are not used as a meansof last resort during economic downturns.

References

Amihud, Y. and Lev, B. (1981) Risk reduction as a managerialmotive for conglomerate mergers, Bell Journal ofEconomics, 12, 605–17.

Anderson, R. C. and Reeb, D. M. (2003) Founding-family own-ership and firm performance: evidence from the S&P 500,Journal of Finance, 58, 1301–28.

Ayers, B. C., Laplante, S. K. and McGuire, S. T. (2010) Creditratings and taxes: the effect of book-tax differences onratings changes, Contemporary Accounting Research, 27,359–402.

Bates, T. W., Kahle, K. M. and Stulz, R. M. (2009) Why do U.S.firms hold so muchmore cash than they used to?, Journal ofFinance, 64, 1985–2021.

Bernanke, B. and Gertler, M. (1989) Agency costs, net worth,and business fluctuations, American Economic Review, 79,14–31.

Campbell, J. L., Chyz, J. A., Dhaliwal, D. S. et al. (2012) Did the2003 tax act increase capital investments by corporations?.Available at SSRN: http://ssrn.com/abstract=1531978(accessed 4 October 2012).

Campbell, J. Y., Hilscher, J. and Szilagyi, J. (2008) In search ofdistress risk, Journal of Finance, 63, 2899–939.

Chetty, R. and Saez, E. (2005) Dividend taxes and corporatebehavior: evidence from the 2003 dividend tax cut,Quarterly Journal of Economics, 120, 791–833.

Dhaliwal, D. S., Erickson, M. M. and Krull, L. K. (2007)Incremental financing decisions and time-series variationin personal taxes on equity income, Journal of AmericanTaxation Association, 29, 1–26.

Dhaliwal, D. S., Huang, S. X., Moser, W. J. et al. (2011)Corporate tax avoidance and the level and valuation offirm cash holdings. Available at SSRN: http://ssrn.com/abstract=1905076 (accessed 4 October 2012).

Dittmar, A. and Mahrt-Smith, J. (2007) Corporate governanceand the value of cash holdings, Journal of FinancialEconomics, 83, 599–634.

Dyreng, S. D., Hanlon, M. and Maydew, E. L. (2008) Long-runcorporate tax avoidance, The Accounting Review, 83, 61–82.

Faulkender, M. (2002) Cash holdings among small businesses.Available at SSRN: http://ssrn.com/abstract=305179(accessed 4 October 2012).

Foley, C. F., Hartzell, J. C., Titman, S. et al. (2007) Why do firmshold so much cash? A tax-based explanation, Journal ofFinancial Economics, 86, 579–607.

Frank, M. Z. and Goyal, V. K. (2011) The profit-leverage puzzlerevisited. Available at SSRN: http://ssrn.com/abstract=1863629 (accessed 4 October 2012).

Fresard, L. (2010) Financial strength and product market beha-vior: the real effects of corporate cash holdings, Journal ofFinance, 65, 1097–122.

Graham, J. R. and Harvey, C. R. (2001) The theory and practiceof corporate finance: evidence from the field, Journal ofFinancial Economics, 60, 187–243.

Hogan, B. and Noga, T. (2012) The association between changesin auditor-provided tax services and long-term corporate tax

1358 H. Di and S. A. Hanke

Dow

nloa

ded

by [

Mos

kow

Sta

te U

niv

Bib

liote

] at

01:

43 0

4 D

ecem

ber

2013

avoidance. Available at SSRN: http://ssrn.com/abstract=1539637 (accessed 4 October 2012).

Hubbard, R. G. (2011) Tax reform is the swiftest path to growth,Wall Street Journal, August 12, p. A.15.

Lin, L. and Flannery, M. J. (2012) Do personal taxes affectcapital structure: evidence from the 2003 tax cut.Available at SSRN: http://ssrn.com/abstract=2021333(accessed 4 October 2012).

Myers, S. C. and Majluf, N. S. (1984) Corporate financing andinvestment decisions when firms have information that

investors do not have, Journal of Financial Economics,13, 187–221.

Opler, T., Pinkowitz, L., Stulz, R. et al. (1999) The determinantsand implications of corporate cash holdings, Journal ofFinancial Economics, 52, 3–46.

Paulson Jr, H. M. (2007) Our broken corporate tax code, WallStreet Journal, July 19, p. A.15.

Shleifer, A. and Vishny, R. W. (1992) Liquidation values anddebt capacity: a market equilibrium approach, Journal ofFinance, 47, 1343–66.

The impact of double taxation on small firms’ cash holdings 1359

Dow

nloa

ded

by [

Mos

kow

Sta

te U

niv

Bib

liote

] at

01:

43 0

4 D

ecem

ber

2013