Trapped Cash and the Profitability of Foreign Acquisitions
University of Toronto - Rotman School of Management
Todd D. Kravet
University of Connecticut - Department of Accounting
Ryan J. Wilson
University of Oregon - Lundquist College of Business
July 11, 2014
Rotman School of Management Working Paper No. 1983292
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 on these transfers. Prior research suggests that the combined effect of these incentives leads some U.S. multinational corporations to 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 (lower announcement window returns, lower buy and hold returns, decreased ROA). 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: 54
Keywords: Taxes, International, Acquisitions, Repatriation
JEL Classification: F23, G34, H25
Date posted: January 12, 2012 ; Last revised: July 26, 2014
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