Working Paper: NBER ID: w12649
Authors: C. Fritz Foley; Jay C. Hartzell; Sheridan Titman; Garry Twite
Abstract: U.S. corporations hold significant amounts of cash on their balance sheets, and these cash holdings have been justified in the existing empirical literature by transaction costs and precautionary motives. An additional explanation, considered in this study, is that U.S. multinational firms hold cash in their foreign subsidiaries because of the tax costs associated with repatriating foreign income. Consistent with this hypothesis, firms that face higher repatriation tax burdens hold higher levels of cash, hold this cash abroad, and hold this cash in affiliates that trigger high tax costs when repatriating earnings. Estimates indicate that a one standard deviation increase in the tax burden from repatriating foreign income is associated with a 7.9% increase in the ratio of cash to net assets. In addition, certain firms, specifically those that are less financially constrained domestically and those that are more technology intensive, exhibit a higher sensitivity of affiliate cash holdings to repatriation tax burdens.
Keywords: cash holdings; tax costs; repatriation; multinational firms; corporate finance
JEL Codes: F23; F3; G32; G35; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Repatriation tax burdens (H22) | Corporate cash holdings (G32) |
| Higher tax costs (H29) | More cash holdings (G19) |
| Repatriation tax burdens (H22) | Cash held abroad (F21) |
| High tax costs (H29) | Higher cash holdings of affiliates (G32) |
| Technology-intensive firms (L63) | Sensitivity of cash holdings to tax burdens (H32) |