Foreign Cash Holdings, Corruption, and Internal Control Weakness: Evidence From U.S. Multinationals

Posted: 13 Nov 2019

See all articles by Bing Luo

Bing Luo

San Francisco State University

Lufei Ruan

San Francisco State University

Date Written: November 4, 2019

Abstract

U.S. multinational firms are holding record high levels of foreign cash, but few studies have explored whether substantial overseas cash brings unique challenges in internal controls with respect to foreign corruption. Using a sample of listed U.S. multinationals in 2011-2018, we document a significantly positive correlation between internal control weaknesses (ICWs) and foreign cash holding, suggesting that firms with high foreign cash holdings have poor internal controls. The economic impact is also meaningful: a one standard deviation increase in foreign cash holdings leads to a 25.94 percent increase in the probability of disclosing ICWs. We also utilize a unique dataset from the Audit Analytics database to identify ICWs specifically related to issues on ethics, foreign subsidiaries, and deferred foreign taxes and document a significantly positive correlation between this alternative measure and foreign cash holdings. Overall, our findings suggest that firms with high foreign cash holdings are likely to engage in bribery activities (either voluntarily or by coercion) and thus deteriorate their internal control quality to hide corporate bribery. In further analyses, we examine factors that strengthen or weaken the positive association between ICWs and foreign cash holdings. We find that the positive association is more pronounced in firms with high risk-taking orientation, consistent with arguments that entrepreneurs’ risk orientation significantly increases the likelihood of corrupt behavior in companies. The positive association is attenuated in firms that operate in more corrupt countries, probably because firms that are exposed to a more corrupt environment take precautionary procedures to safeguard their liquid assets.

Keywords: Internal control weakness (ICW), foreign cash holding, corruption, multinationals

Suggested Citation

Luo, Bing and Ruan, Lufei, Foreign Cash Holdings, Corruption, and Internal Control Weakness: Evidence From U.S. Multinationals (November 4, 2019). Available at SSRN: https://ssrn.com/abstract=3480696

Bing Luo

San Francisco State University ( email )

1600 Holloway Avenue
San Francisco, 94132
United States

Lufei Ruan (Contact Author)

San Francisco State University ( email )

1600 Holloway Avenue
San Francisco, CA 94132
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
47
PlumX Metrics