Foreign Cash: Taxes, Internal Capital Markets, and Agency Problems

The Review of Financial Studies, Forthcoming

73 Pages Posted: 4 Aug 2014 Last revised: 28 Sep 2016

See all articles by Jarrad Harford

Jarrad Harford

University of Washington; European Corporate Governance Institute (ECGI)

Cong Wang

The Chinese University of Hong Kong, Shenzhen

Kuo Zhang

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Date Written: September 27, 2016

Abstract

The greater is the fraction of a firm’s cash held overseas, the lower shareholders value that cash. This goes beyond a pure tax effect — the repatriation tax friction disrupts the firm’s internal capital market, distorting its investment policy. Firms underinvest domestically and overinvest abroad. Our findings are more pronounced when firms are subject to higher repatriation tax rates, higher costs of borrowing, and more agency problems. Overall, our evidence suggests that a combination of taxes, financing frictions, and agency problems leads to a valuation discount for foreign cash and documents real effects of how foreign earnings are taxed.

Keywords: Cash trapped overseas, Value of foreign cash, Repatriation cost, Domestic investment-cash flow sensitivity

JEL Classification: G32, G34

Suggested Citation

Harford, Jarrad and Wang, Cong and Zhang, Kuo, Foreign Cash: Taxes, Internal Capital Markets, and Agency Problems (September 27, 2016). The Review of Financial Studies, Forthcoming , Available at SSRN: https://ssrn.com/abstract=2475562 or http://dx.doi.org/10.2139/ssrn.2475562

Jarrad Harford (Contact Author)

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)

HOME PAGE: http://faculty.washington.edu/jarrad/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Cong Wang

The Chinese University of Hong Kong, Shenzhen ( email )

Kuo Zhang

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

1954 Huashan Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
China

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
932
Abstract Views
27,849
rank
26,335
PlumX Metrics