U.S. Multinationals’ Foreign Cash Holdings: An Empirical Estimate and the Impact of the Tax Cuts and Jobs Act of 2017 on the Value of Foreign Cash

Abstract

We use publicly available information to estimate the country location of multinational firms’ cash holdings, examine why investors discount the value of cash held overseas, and examine whether that discount changes after the Tax Cuts and Jobs Act (TCJA) of 2017. We provide three main results. First, our country-level foreign cash estimates are reasonably accurate, evidenced by high correlations with simulated data as well as proprietary country-level data from the Bureau of Economic Analysis (BEA), high adjusted R2 when explaining a firm’s total cash holdings, and the ability to replicate findings from prior studies using our cash estimates. Second, we demonstrate that investors value foreign cash holdings more negatively than domestic cash holdings when the cash is held in high agency cost countries (i.e., countries with low taxes, poor governance, capital controls, and greater cross-border frictions), and that this effect is largely driven by the presence of foreign cash in tax haven countries. Finally, we find that investors no longer appear to discount foreign cash after the TCJA, when the U.S. moved from a worldwide to a quasi-territorial taxation system. This last finding is consistent with the aims of the TCJA, as investors no longer appear to view foreign cash holdings as being subject to significant incremental taxation if returned to the U.S. or otherwise as being trapped overseas to be re-invested sub-optimally.

Keywords: Value of Cash; Foreign Cash; Agency Costs; Multinational Corporations; Corporate Governance