How do firm's use cash tax savings? A cross-country analysis

Avoiding cash taxes can serve as a significant source of additional cash flows for firms, though how managers utilize these funds and the resulting consequences remain open empirical questions. We provide answers by examining the association between the amount of cash tax savings and two uses of cash – investment and dividend payout – for an international sample of firms. We find that firms are more likely to invest cash tax savings rather than distribute them in the form of dividends and that this results in inefficient overinvestment. We find that our results hold for an international sample of domestic-only sample, distinguishing our study from US-only studies, which focus on constraints and distortions of multi-national corporations in a worldwide tax system. We find nuanced results when partitioning on country-level governance. Our results suggest cash tax avoidance has real effects on firm decisions, namely investment and payout policies, and this effect varies based on the country in which the firm operates