The Effect of Tax Avoidance on Investment Efficiency: The Mediating Role of Cash Holding—Evidence from Egypt

Abstract

Abstract Purpose– This study aims to investigate the influence of tax avoidance on investment efficiency, while also examining the mediating role of cash holding in this relationship. Design/methodology/approach– Utilizing a sample comprising 321 firm-year observations from Egypt, we employ Ordinary Least Squares (OLS) regression to examine both the direct and indirect associations between tax avoidance and investment efficiency. Findings– The results revealed a significant positive effect of tax avoidance on cash holding and excess cash. Moreover, there is contrasting findings on the effect of cash holding on investment efficiency. Additionally, the study revealed a significant negative effect of tax avoidance on investment efficiency, with a positive effect on overinvestment and a negative effect on underinvestment. Furthermore, cash holding played a mediating role in the relationship between tax avoidance and investment efficiency. Practical implications– The insights gleaned from this study hold significant implications for various stakeholders in Egypt, including tax authorities, investors, and listed firms. Given the current economic instability in Egypt, where many firms resort to cash hoarding to mitigate potential future financial constraints, these findings offer valuable guidance for regulatory agencies, investors, and firms navigating uncertain economic conditions. Originality– This paper explores how tax avoidance influences cash holdings and investment efficiency in Egyptian firms, filling a gap in existing literature. It introduces a novel perspective by examining the mediating role of cash holdings between tax avoidance strategies and investment outcomes. By focusing on the specific context of Egyptian firms, it offers unique insights into the complex interplay between tax-related decisions, financial management, and firm performance. Overall, the study provides valuable contributions to understanding the dynamics of tax planning and its implications for corporate finance in emerging market economies.