Cash Holdings, Tax Repatriation Costs and Market Uncertainty

Posted: 12 Dec 2014

See all articles by Michele Fabrizi

Michele Fabrizi

University of Padua

Elisabetta Ipino

Concordia University, Quebec

Antonio Parbonetti

University of Padua

Date Written: December 10, 2014

Abstract

In this paper, we develop and test the hypothesis that tax repatriation costs increase the uncertainty embedded in cash holdings. The intuition behind our empirical prediction relies on the notion that tax repatriation costs are a strong indication that part of the cash is not available to shareholders but is trapped abroad. Using a large sample of U.S. firms during the 1991-2012 period and an array of proxies for market uncertainty, we find evidence consistent with our hypothesis. Specifically, we document that the interaction of cash holdings with tax repatriation costs decreases the precision of analysts’ forecasts and generates differential belief revisions among investors. These findings help shed light on the implications and on the economic consequences of cash holdings and offer support to the SEC’s recent effort to encourage companies to increase disclosure of their cash holdings.

Keywords: Cash, Taxes, Repatriation, Uncertainty

JEL Classification: G30, G38, H25

Suggested Citation

Fabrizi, Michele and Ipino, Elisabetta and Parbonetti, Antonio, Cash Holdings, Tax Repatriation Costs and Market Uncertainty (December 10, 2014). Available at SSRN: https://ssrn.com/abstract=2536467 or http://dx.doi.org/10.2139/ssrn.2536467

Michele Fabrizi (Contact Author)

University of Padua ( email )

Via del Santo, 33
Padova, Padova 35123
Italy

Elisabetta Ipino

Concordia University, Quebec ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1MB
Canada

Antonio Parbonetti

University of Padua ( email )

Via del Santo 33
Padova, 35123
Italy
+39 049 8274261 (Phone)

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