The effect of tax avoidance and firm’s life cycle on cash holdings: Evidence from Egyptian stock market

This research aims to investigate the impact of tax avoidance and firm life cycle on cash holdings for a sample of 126 non-financials companies listed on the Egyptian stock market with 711 observations for the period 2012 - 2019. Tax avoidance, the first independent variable is measured by two proxies: the current effective tax rate (ETR), and book tax difference ratio (BTD). For the second independent variable, firm’s life cycle, the cash flow approach is used to capture the five stages of the life cycle. Turning to the cash holdings as the dependent variable, two indicators are used. The first main indicator is Ln cash ratio calculated by taking the natural logarithm of cash and cash equivalents to total assets. The second indicator is used in the robustness test, which is calculated as the natural logarithm of cash and cash equivalents divided by total assets minus cash and cash equivalents. The results elaborated that there is a significant negative relationship between tax avoidance measured by the two proxies and cash holdings measured by the two indicators. Additionally, the findings displayed that the introduction stage of the firm’s life cycle has a significant negative impact on cash holdings and a significant positive effect of shake-out stage on cash holdings while there is no relationship between the growth, mature and decline stages and cash holdings. The statistical tests are repeated for all variables using the second indicator of cash holding and the same results are obtained. Beyond these tests, for more analysis the research sample is divided into five subsamples presented the five stages of firm’s life cycle. The results showed that higher negative impact of tax avoidance on cash holdings lies in the shake-out and the decline stages. On the other side, no impact of tax avoidance on cash holdings in the remaining stages.