The Relation Among Trapped Cash, Permanently Reinvested Earnings, and Foreign Cash

59 Pages Posted: 30 May 2017

See all articles by Stacie Kelley Laplante

Stacie Kelley Laplante

University of Wisconsin - Madison

Wayne L. Nesbitt

Michigan State University, Eli Broad College of Business

Date Written: March 22, 2017

Abstract

We investigate the relation among trapped cash, permanently reinvested earnings, and foreign cash. We define trapped cash as cash and cash equivalents generated by foreign earnings and held by U.S. MNC’s foreign subsidiaries due to concerns over repatriation taxes, and explain why trapped cash, permanently reinvested earnings, and foreign cash are not synonymous. We exploit the one-time tax rate reduction on repatriated earnings provided for under the American Jobs Creation Act of 2004 to construct a proxy to identify firms with trapped cash. We find R&D intensity, capital intensity, foreign growth opportunities and tax haven subsidiaries are significant indicators of trapped cash. Interestingly, we find firms with tax haven operations are less likely to have trapped cash. These findings highlight the joint role of tax havens as low-tax jurisdictions and offshore financial hubs. Finally, we investigate the relation between firm value and trapped cash. Controlling for excess cash, we find that trapped cash is negatively related to firm value, but primarily for firms with poor governance. Overall, results suggest that our measure is a parsimonious way to estimate the likelihood of having trapped cash that can be applied to a large sample of firms.

Keywords: trapped cash, permanently reinvested earnings, foreign cash, tax planning

JEL Classification: G38, H25, H32, M41

Suggested Citation

Laplante, Stacie Kelley and Nesbitt, Wayne L., The Relation Among Trapped Cash, Permanently Reinvested Earnings, and Foreign Cash (March 22, 2017). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2939221

Stacie Kelley Laplante

University of Wisconsin - Madison ( email )

975 University Avenue
Madison, WI 53706
United States
608-265-3494 (Phone)
608-265-3494 (Fax)

Wayne L. Nesbitt (Contact Author)

Michigan State University, Eli Broad College of Business ( email )

North Business College Complex
632 Bogue Street N261
East Lansing, MI 48824-1034
United States
517-432-4407 (Phone)
517-432-1101 (Fax)

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