The Location, Composition, and Investment Implications of Permanently Reinvested Earnings

Abstract

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. Our analyses suggest that PRE designations are driven in part by tax and growth incentives – 24 percent of PRE is located in affiliates residing in tax havens, and 39 percent of PRE is in high-growth affiliates. Furthermore, we find that a significant amount of PRE – 45 percent – is invested in financial assets. Given that a substantial proportion of PRE is in financial assets, we investigate whether PRE affects MNCs’ domestic investment. We find that domestic investment by MNCs with PRE is less responsive to domestic investment opportunities and more sensitive to domestic cash flow, implying that PRE creates internal capital market frictions.

Keywords: permanently reinvested earnings; repatriation tax; internal capital market efficiency