Investment Opportunities, Free-Cash-Flow, and the Market Values of Foreign and Domestic Cash Holdings
38 Pages Posted: 26 Sep 2013 Last revised: 17 Apr 2014
Date Written: September 1, 2013
It has been suggested that firms with foreign operations stockpile large amounts of cash, primarily in their foreign subsidiaries, because bringing the cash home involves paying a repatriation tax on foreign income. This implies that the stock market should value foreign-held cash less than domestically-held cash. But this effect may be moderated by the impact of investment opportunities abroad that would provide an outlet for the foreign cash and affect how the market values it. This paper empirically examines the difference between the market values of on-balance-sheet cash held domestically and that held abroad by US firms, and the impact of the interaction of the repatriation tax and investment opportunities on this difference. The results show that shareholders assign a higher value to cash held abroad than to cash held domestically, and that the marginal value of foreign-held cash is substantially higher than that of domestic cash for US firms with better foreign investment opportunities. This suggests that the effect of the differential investment opportunities for foreign and domestic cash swamps the repatriation-tax disadvantage of foreign cash. As further evidence, this paper also examines the effect of the exogenous shock provided by the tax repatriation holiday in 2004, and finds that firms with better investment opportunities abroad experienced lower abnormal returns following the passage of that legislation.
Keywords: Cash Holdings, Repatriation Tax, Free Cash Flow, Investment Opportunities
JEL Classification: G31, G32, H26
Suggested Citation: Suggested Citation