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
University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)
Garry J. Twite
University of Melbourne - Department of Finance; University of Melbourne - Faculty of Business and Economics; Financial Research Network (FIRN)
AFA 2006 Boston Meetings Paper
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
Date posted: February 3, 2005
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