The Persistence and Pricing of Changes in Multinational Firms' Foreign Cash Holdings

57 Pages Posted: 3 Jun 2019

See all articles by Novia (Xi) Chen

Novia (Xi) Chen

University of Houston - Department of Accountancy & Taxation

Peng-Chia Chiu

The Chinese University of Hong Kong (CUHK)

Terry J. Shevlin

University of California-Irvine

Date Written: May 14, 2019

Abstract

Using a hand-collected sample of U.S. multinational firms’ foreign and domestic cash holdings, we evaluate the earnings persistence implications of foreign and domestic cash changes. Building on the earnings decomposition approach in Dechow, Richardson, and Sloan (2008), we find that, in the overall sample, changes in foreign cash are as persistent for future earnings as changes in domestic cash. In the cross-section, we find that foreign cash changes have higher persistence when foreign operations offer better growth opportunities and when repatriation taxes are lower. Our second analysis investigates whether investors efficiently price foreign and domestic cash changes. We find a positive association between current foreign cash changes and one-year-ahead stock returns, suggesting that investors under-react to foreign cash changes. We further document that investors are more likely to misprice foreign cash changes when information processing costs are higher and when firms have poorer information environments.

Keywords: Foreign Cash, Earnings Persistence, Stock Returns

Suggested Citation

Chen, Novia (Xi) and Chiu, Peng-Chia and Shevlin, Terry J., The Persistence and Pricing of Changes in Multinational Firms' Foreign Cash Holdings (May 14, 2019). Available at SSRN: https://ssrn.com/abstract=3388358 or http://dx.doi.org/10.2139/ssrn.3388358

Novia (Xi) Chen (Contact Author)

University of Houston - Department of Accountancy & Taxation ( email )

Bauer College of Business
4800 Calhoun Road
Houston, TX 77204
United States

Peng-Chia Chiu

The Chinese University of Hong Kong (CUHK) ( email )

Hong Kong
Hong Kong

Terry J. Shevlin

University of California-Irvine ( email )

Irvine, CA California 92697-3125
United States
2065509891 (Phone)

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