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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

Jarrad Harford

University of Washington

Cong Wang

China Europe International Business School (CEIBS)

Kuo Zhang

Xiamen University, School of Economics & WISE

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/

Cong Wang

China Europe International Business School (CEIBS) ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

Kuo Zhang

Xiamen University, School of Economics & WISE ( email )

Xiamen, Fujian 361005
China

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