The Location, Composition, and Investment Implications of Permanently Reinvested Earnings
Jennifer L. Blouin
University of Pennsylvania - Accounting Department
Linda K. Krull
University of Oregon
Leslie A. Robinson
Dartmouth College - Tuck School of Business
October 1, 2013
This study uses permanently reinvested earnings (PRE) reported in U.S. multinational corporations (MNCs) financial statements, combined with detailed information on foreign affiliate assets to estimate the location, composition, and investment implications of PRE. We use these estimates to study the motivations for PRE designations and the implications of PRE for growth and liquidity. Our analyses suggest that PRE designations are driven by tax and growth incentives – 25 percent of PRE is located in affiliates residing in tax havens, and 34 percent of PRE is in high-growth affiliates. Furthermore, we find that a significant amount of PRE – 50 percent – is invested in non-financial assets. Given that a substantial portion of PRE is in non-financial assets, we investigate whether the SEC’s concerns regarding PRE and liquidity affect MNCs’ domestic investment activity. We find that MNCs with PRE have domestic investment that is less responsive to domestic investment opportunities and more sensitive to domestic cash implying that PRE firms have less efficient internal capital markets.
Number of Pages in PDF File: 43
Keywords: permanently reinvested earnings (PRE), APB 23, repatriation tax, foreign earningsworking papers series
Date posted: October 1, 2012 ; Last revised: December 24, 2013
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