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The relation among trapped cash, permanently reinvested earnings, and foreign cash

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  • Laplante, Stacie K.
  • Nesbitt, Wayne L.

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.

Suggested Citation

  • Laplante, Stacie K. & Nesbitt, Wayne L., 2017. "The relation among trapped cash, permanently reinvested earnings, and foreign cash," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 126-148.
    • Handle: RePEc:eee:corfin:v:44:y:2017:i:c:p:126-148
    DOI: 10.1016/j.jcorpfin.2017.03.005
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    3. Robinson Reyes-Peña & Arun Upadhyay & Arun Kumaraswamy, 2023. "Foreign competitive pressure and inversions by U.S. multinational enterprises," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 54(5), pages 829-851, July.
    4. Richardson, Grant & Taylor, Grantley & Obaydin, Ivan, 2020. "Does the use of tax haven subsidiaries by U.S. multinational corporations affect the cost of bank loans?," Journal of Corporate Finance, Elsevier, vol. 64(C).
    5. Tahir, Muhammad & Ibrahim, Haslindar & Zulkafli, Abdul Hadi & Mushtaq, Muhammad, 2020. "Corruption, national culture, law and dividend repatriation policy," Journal of Multinational Financial Management, Elsevier, vol. 57.
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    7. Petr Janský & Jan Láznička & Miroslav Palanský, 2021. "Tax treaties worldwide: Estimating elasticities and revenue foregone," Review of International Economics, Wiley Blackwell, vol. 29(2), pages 359-401, May.
    8. Anthony Ray Martin, 2019. "The Scope Taxation in Influencing Entrepreneurship: Historical Overview of Tax Policies," Business and Economic Research, Macrothink Institute, vol. 9(1), pages 123-135, March.

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    More about this item

    Keywords

    Trapped cash; Tax planning; Multinational corporations;
    All these keywords.

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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