Corporate tax avoidance and cash holdings: The role of institutional investors’ investment horizons

The purpose of this paper is to shed light on the ambiguity surrounding corporate tax avoidance and cash holdings relationship. It also investigates whether institutional investors (II)’ horizon affects this relationship. Based on a sample of 200 French listed firms from 2008 to 2017 and using the GMM estimator, the results reveal that tax avoidance practices significantly increase the company’s cash holdings levels suggesting that managers use tax avoidance to opportunistically extract cash. Moreover, the results show that the positive effect of tax avoidance on cash holdings is more prevalent in the presence of II with a short-term horizon. Conversely, long-term II curb the company’s incentives to increase its cash reserves from tax reduction activities.