U.S. corporations hold significant amounts of cash on their balance sheets, and these cash holdings have been justified in the existing empirical literature by transaction costs and precautionary motives. An additional explanation, considered in this study, is that U.S. multinational firms hold cash in their foreign subsidiaries because of the tax costs associated with repatriating foreign income. Consistent with this hypothesis, firms that face higher repatriation tax burdens hold higher levels of cash, hold this cash abroad, and hold this cash in affiliates that trigger high tax costs when repatriating earnings. Estimates indicate that a one standard deviation increase in the tax burden from repatriating foreign income is associated with a 7.9% increase in the ratio of cash to net assets. In addition, certain firms, specifically those that are less financially constrained domestically and those that are more technology intensive, exhibit a higher sensitivity of affiliate cash holdings to repatriation tax burdens.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
12649.
Length: Date of creation: Oct 2006 Date of revision: Handle: RePEc:nbr:nberwo:12649
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Find related papers by JEL classification: F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business F3 - International Economics - - International Finance G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
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Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004.
"The Cash Flow Sensitivity of Cash,"
Journal of Finance,
American Finance Association, vol. 59(4), pages 1777-1804, 08.
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