The Persistence and Pricing of Changes in Multinational Firms' Foreign Cash Holdings
57 Pages Posted: 3 Jun 2019
Date Written: May 14, 2019
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
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