Trapped Cash and the Profitability of Foreign Acquisitions

54 Pages Posted: 12 Jan 2012 Last revised: 26 Jul 2014

Alexander Edwards

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

Date Written: July 11, 2014

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 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.

Keywords: Taxes, International, Acquisitions, Repatriation

JEL Classification: F23, G34, H25

Suggested Citation

Edwards, Alexander and Kravet, Todd D. and Wilson, Ryan J., Trapped Cash and the Profitability of Foreign Acquisitions (July 11, 2014). Rotman School of Management Working Paper No. 1983292. Available at SSRN: https://ssrn.com/abstract=1983292 or http://dx.doi.org/10.2139/ssrn.1983292

Alexander S. Edwards

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada

Todd D. Kravet

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

Ryan J. Wilson (Contact Author)

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

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