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
Date Written: September 27, 2016
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: Suggested Citation