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Understanding Precautionary Cash at Home and Abroad

Listed author(s):
  • Michael W. Faulkender
  • Kristine W. Hankins
  • Mitchell A. Petersen

Has the need for precautionary savings driven the dramatic increase in U.S. corporate cash? We show that the run-up in cash is concentrated in foreign subsidiaries of multinational corporations. Precautionary motives explain variation in the level of cash held domestically, but not the level or growth of foreign cash. Multinational firms’ foreign cash balances are instead explained by low foreign tax rates and the ability to transfer profits within the firm through among related subsidiaries. The firms with the greatest incentive and ability to transfer income to low tax jurisdictions do, causing cash to accumulate in their foreign subsidiaries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23799.

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Date of creation: Sep 2017
Handle: RePEc:nbr:nberwo:23799
Note: CF
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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. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
  3. Grubert, Harry, 2003. "Intangible Income, Intercompany Transactions, Income Shifting, and the Choice of Location," National Tax Journal, National Tax Association, vol. 56(1), pages 221-242, March.
  4. 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, 06.
  5. 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.
  6. 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.
  7. 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.
  8. Michael Faulkender & Mitchell Petersen, 2012. "Investment and Capital Constraints: Repatriations Under the American Jobs Creation Act," Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3351-3388.
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