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Understanding the Rise in Corporate Cash: Precautionary Savings or Foreign Taxes

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  • Michael W. Faulkender
  • Kristine W. Hankins
  • Mitchell A. Petersen

Abstract

What has driven the dramatic rise in U.S. corporate cash? Using non-public data, we show that the run-up is not uniform across firms but is concentrated in the foreign subsidiaries of multinational firms. Standard precautionary motives explain only domestic cash holdings, not these burgeoning foreign cash balances. Falling foreign tax rates, coupled with relaxed restrictions on income shifting, are the root of the changing foreign cash patterns. Firms with intellectual property have the greatest ability to shift income to low tax jurisdictions, and their foreign subsidiaries are where we observe the largest accumulations of cash.

Suggested Citation

  • Michael W. Faulkender & Kristine W. Hankins & Mitchell A. Petersen, 2017. "Understanding the Rise in Corporate Cash: Precautionary Savings or Foreign Taxes," NBER Working Papers 23799, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:23799
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    References listed on IDEAS

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    1. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    2. Grubert, Harry, 2003. "Intangible Income, Intercompany Transactions, Income Shifting, and the Choice of Location," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(1), pages 221-242, March.
    3. Jarrad Harford & Sandy Klasa & William F. Maxwell, 2014. "Refinancing Risk and Cash Holdings," Journal of Finance, American Finance Association, vol. 69(3), pages 975-1012, June.
    4. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    5. Martin, J. Spencer & Santomero, Anthony M., 1997. "Investment opportunities and corporate demand for lines of credit," Journal of Banking & Finance, Elsevier, vol. 21(10), pages 1331-1350, October.
    6. repec:oup:rfinst:v:25:y::i:11:p:3351-3388 is not listed on IDEAS
    7. Michael Faulkender & Mitchell Petersen, 2012. "Investment and Capital Constraints: Repatriations Under the American Jobs Creation Act," The Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3351-3388.
    8. Grubert, Harry & Mutti, John, 1991. "Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 285-293, May.
    9. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    10. Ran Duchin & Thomas Gilbert & Jarrad Harford & Christopher Hrdlicka, 2017. "Precautionary Savings with Risky Assets: When Cash Is Not Cash," Journal of Finance, American Finance Association, vol. 72(2), pages 793-852, April.
    11. Fritz Foley, C. & Hartzell, Jay C. & Titman, Sheridan & Twite, Garry, 2007. "Why do firms hold so much cash? A tax-based explanation," Journal of Financial Economics, Elsevier, vol. 86(3), pages 579-607, December.
    12. Jarrad Harford & Cong Wang & Kuo Zhang, 2017. "Foreign Cash: Taxes, Internal Capital Markets, and Agency Problems," The Review of Financial Studies, Society for Financial Studies, vol. 30(5), pages 1490-1538.
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    Cited by:

    1. Milton Harris & Artur Raviv, 2017. "Why Do Firms Sit on Cash? An Asymmetric Information Approach," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 6(2), pages 141-173.
    2. Marie-Baïanne Khder & Simon Ray, 2020. "Cash Accumulation by Non Financial Corporations: New Evidence of the Role of Hedging Needs and Lower Financing Costs in France," Economie et Statistique / Economics and Statistics, Institut National de la Statistique et des Etudes Economiques (INSEE), issue 520-521, pages 103-124.

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    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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