Trapped Cash and the Profitability of Foreign Acquisitions

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

working papers series