Abstract

http://ssrn.com/abstract=654881
 
 

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Why Do Firms Hold So Much Cash? A Tax-Based Explanation


C. Fritz Foley


Harvard Business School; National Bureau of Economic Research (NBER)

Jay C. Hartzell


University of Texas at Austin - Department of Finance

Sheridan Titman


University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Garry J. Twite


University of Texas at Austin - Department of Finance

February 2007

AFA 2006 Boston Meetings Paper

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.

Number of Pages in PDF File: 44

Keywords: Cash, Taxes, Repatriation

JEL Classification: G30, G38

working papers series


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Date posted: February 3, 2005  

Suggested Citation

Foley, C. Fritz and Hartzell, Jay C. and Titman, Sheridan and Twite, Garry J., Why Do Firms Hold So Much Cash? A Tax-Based Explanation (February 2007). AFA 2006 Boston Meetings Paper. Available at SSRN: http://ssrn.com/abstract=654881 or http://dx.doi.org/10.2139/ssrn.654881

Contact Information

C. Fritz Foley
Harvard Business School ( email )
Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
617-495-6375 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jay C. Hartzell (Contact Author)
University of Texas at Austin - Department of Finance ( email )
1 University Station B6600
Austin, TX 78712
United States
512-471-6779 (Phone)
512-471-5073 (Fax)
HOME PAGE: http://www.mccombs.utexas.edu/faculty/jay.hartzell/
Sheridan Titman
University of Texas at Austin - Department of Finance ( email )
Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Garry J. Twite
University of Texas at Austin - Department of Finance ( email )
Red McCombs School of Business
Austin, TX 78712
United States
(512) 471 5682 (Phone)
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