It is Not a Flat World after All: Tax Repatriation Costs and Cash Value

24 Pages Posted: 17 Sep 2018

See all articles by Michele Fabrizi

Michele Fabrizi

University of Padova

Elisabetta Ipino

Concordia University, Quebec - Department of Accountancy

Antonio Parbonetti

University of Padua

Date Written: October 2018

Abstract

US corporations have accumulated record‐high amounts of cash, and most of it is trapped in foreign accounts. This study tests the hypothesis that the marginal value of cash decreases in the presence of tax repatriation costs, as these costs are a strong indication that part of the cash is trapped abroad. Cash abroad is not readily available to the company because it is subject to an additional layer of tax before it can be used or distributed. Moreover, uncertainty surrounds the potential use of foreign cash, and research documents that firms holding high amounts of cash abroad are likely to invest in negative net present value activities. Finally, possible changes in tax regulation are an additional source of uncertainty. Consequently, foreign cash should be worth less than domestic cash. Using a large sample of US firms drawn from COMPUSTAT during the 1991–2012 period, the analysis suggests that shareholders value an extra dollar of cash at $1.086. However, this result changes dramatically when the change in cash is interacted with the tax cost of repatriating the earnings. That is, the marginal value of cash decreases significantly in the presence of tax repatriation costs, and shareholders discount cash when it is likely to be held abroad. This study contributes to the literature on cash holding by investigating whether tax repatriation costs affect the value of corporate cash. Moreover, the findings show that there are important economic consequences linked to the phenomenon of cash accumulation in foreign countries and therefore provide regulators with a sound foundation on which to take additional actions to require more disclosure of and transparency in the actual location of firms’ cash holdings.

Keywords: cash holding, disclosure, repatriation cost

Suggested Citation

Fabrizi, Michele and Ipino, Elisabetta and Parbonetti, Antonio, It is Not a Flat World after All: Tax Repatriation Costs and Cash Value (October 2018). Journal of International Financial Management & Accounting, Vol. 29, Issue 3, pp. 223-246, 2018, Available at SSRN: https://ssrn.com/abstract=3244750 or http://dx.doi.org/10.1111/jifm.12079

Michele Fabrizi (Contact Author)

University of Padova ( email )

Via del Santo, 33
Padova, Padova 35123
Italy

Elisabetta Ipino

Concordia University, Quebec - Department of Accountancy ( email )

Montreal, Quebec H3G 1M8
Canada

Antonio Parbonetti

University of Padua ( email )

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

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