Value‐Added‐Tax and Corporate Cash Holdings Evidence From a Quasi‐Natural Experiment

ABSTRACT This study examines the impact of the value‐added tax system (VAT) on corporate cash holdings. We utilise a quasi‐natural experiment provided by a tax policy reform in China, where business tax was replaced with VAT for specific companies. Employing panel data and a difference‐in‐differences approach, our analysis reveals that firms subject to the new tax policy experience a 1.4% reduction in their cash‐to‐assets ratio. This decrease in cash holdings is particularly notable among firms with an active dividend payout policy. Furthermore, we show that the transition to VAT encourages firms to outsource production and services to capitalise on the tax credits offered by the VAT system. Overall, our findings highlight how tax policy can significantly influence corporate financial behaviour and strategic resource allocation.

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Publication Details

Journal
Accounting and Finance
Published
2025-09-01
DOI
https://doi.org/10.1111/acfi.70087
Primary Topic
Corporate Finance and Governance
Type
article
Field-Weighted Citation Impact
0.00

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article

Value‐Added‐Tax and Corporate Cash Holdings Evidence From a Quasi‐Natural Experiment

Junyu Wu, Siyuan Ni, Song Wang, Chen Ling
Accounting and Finance
Corporate Finance and Governance
article

Value‐Added‐Tax and Corporate Cash Holdings Evidence From a Quasi‐Natural Experiment

Junyu Wu, Siyuan Ni, Song Wang, Chen Ling
article en

Abstract

ABSTRACT This study examines the impact of the value‐added tax system (VAT) on corporate cash holdings. We utilise a quasi‐natural experiment provided by a tax policy reform in China, where business tax was replaced with VAT for specific companies. Employing panel data and a difference‐in‐differences approach, our analysis reveals that firms subject to the new tax policy experience a 1.4% reduction in their cash‐to‐assets ratio. This decrease in cash holdings is particularly notable among firms with an active dividend payout policy. Furthermore, we show that the transition to VAT encourages firms to outsource production and services to capitalise on the tax credits offered by the VAT system. Overall, our findings highlight how tax policy can significantly influence corporate financial behaviour and strategic resource allocation.

Accounting and FinanceVol. 66(1)
St. Mary's University, Texas (US), Zhejiang University of Finance and Economics (CN)
China Scholarship Council
Openalex Percentile: Top 66%
Corporate Finance and Governance
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