The Mediation effect of Tax Avoidance on the Relationship between Corporate Financial Constraints and Cash Holding: An Empirical Study

Document Type : Original Article

Author

Accounting department Faculty of Commerce Zagazig University

Abstract

This study aimed to investigate the direct relationship between corporate financial constraints and their behavior towards cash holding, in addition to examine the mediation effect of tax avoidance on the relationship between corporate financial constraints and cash holding behavior, using a random sample from (136) companies listed in the Egyptian Stock Exchange belonged to (14) different economic sectors, with a total of (1296) observations during the period from 2008 to 2018.
The researcher used alternative measures of the research variables in order to check the Robustness of the results; Therefore, corporate financial constraints was measured using: (1) Cash-Cash Flow Sensitivity Index, (2) The Dividend Payout Indicator. Companies cash holding behavior was measured by determining: (1) the ratio of cash held to the total assets of company excluding cash, and (2) the proportion of cash held and adjusted by the sector which the company belongs. While, tax avoidance was measured by using three alternative measures: current effective tax rate, defferred tax rate, and permanent book tax differences.
The researcher depended on the path analysis method to test the research hypotheses by designing a set of structural equations models to test the direct paths between corporate financial constraints and cash holding, in addition to investigate the direct paths between corporate financial constraints and tax avoidance, and between tax avoidance and cash holding, to determine the indirect relationship between corporate financial constraints and cash holding by mediating tax avoidance.
The results indicated that there was a positive and direct relationship between corporate financial constraints and cash holding, as well as a positive and indirect relationship between corporate financial constraints and cash holding under mediating tax avoidance. Therefore, managers of financially restricted corporations intended to expand in applying tax avoidance practices and taking advantage of some vague aspects in tax laws to achieve tax savings and meet company's future cash needs as a result of its inability to finance them from external sources due to its financial constraints, and the precautionary motive of cash holding increased in financial constrained companies to face risks of discovering its tax avoidance by the authorities responsible for implementing tax laws.

Keywords

Files

Share

How to cite

Statistics