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Trapped Cash and the Profitability of Foreign Acquisitions


Alexander Edwards


University of Toronto - Rotman School of Management

Todd D. Kravet


University of Texas at Dallas - Naveen Jindal School of Management

Ryan J. Wilson


University of Oregon - Lundquist College of Business

April 25, 2013

Rotman School of Management Working Paper No. 1983292

Abstract:     
Current U.S. reporting and tax laws create an incentive for some U.S. firms to avoid the repatriation of foreign earnings as the U.S. government charges additional corporate taxes upon repatriation of foreign earnings. Prior research suggests that the combined effect of these incentives leads some U.S. multinational corporations to delay the repatriation of foreign earnings and, as a result hold a significant amount of cash overseas. In this study, we investigate the effect of cash trapped overseas on U.S. multinational corporation’s foreign acquisitions. Consistent with expectations, we observe firms with high levels of trapped cash make less profitable acquisitions of foreign target firms using cash consideration (decreased ROA, lower buy and hold returns, lower announcement window returns). The AJCA of 2004 reduced this effect by allowing firms to repatriate foreign earnings held as cash abroad at a much lower tax cost. Our study has implications for current proposals to change the tax laws related to foreign earnings.

Number of Pages in PDF File: 49

Keywords: Taxes, International, Acquisitions

JEL Classification: F23, G34, H25

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Date posted: January 12, 2012 ; Last revised: April 30, 2013

Suggested Citation

Edwards, Alexander and Kravet, Todd D. and Wilson, Ryan J., Trapped Cash and the Profitability of Foreign Acquisitions (April 25, 2013). Rotman School of Management Working Paper No. 1983292. Available at SSRN: http://ssrn.com/abstract=1983292 or http://dx.doi.org/10.2139/ssrn.1983292

Contact Information

Alexander S. Edwards
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada
Todd D. Kravet
University of Texas at Dallas - Naveen Jindal School of Management ( email )
800 West Campbell Road
Richardson, TX 75080-3021
United States
Ryan J. Wilson (Contact Author)
University of Oregon - Lundquist College of Business ( email )
1280 University of Oregon
Eugene, OR 97403
United States
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