U.S. Multinational Corporations’ Foreign Cash Holdings: An Empirical Estimate and Its Valuation Consequences
60 Pages Posted: 13 Jun 2013 Last revised: 18 Apr 2018
Date Written: April 6, 2018
Regulators have recently expressed concern that existing disclosure rules prevent financial users from fully understanding the location of a firm’s operations. In this study, we develop an estimate of the location of firms’ cash holdings using financial statement data and validate our estimate with simulated and proprietary data. We then investigate whether agency costs of free cash flows differ for foreign versus domestic cash holdings and offer two main results. First, contrary to prior literature, we find that aggregate excess foreign cash holdings do not have a more negative effect on the marginal value of cash than excess domestic cash holdings during our sample period. However, we do find that excess foreign cash held in high agency cost environments has a more negative effect on the marginal value of cash than both excess domestic cash holdings and excess foreign cash holdings held in lower agency cost environments. Moreover, this result is driven by a variety of country characteristics that increase agency costs and is not explained by any single characteristic (e.g., corruption, economic growth, taxes, etc.).
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