The Valuation Consequences of U.S. Multinational Corporations' Foreign Cash Holdings

• In Event: Determinants of Cash Retention and Payouts

Abstract

U.S. firms’ cash balances are held across multiple countries that vary in the uncertainty of their business environment and the nature of their tax costs. In this study, we develop an empirical estimate of the country location of a firm’s cash holdings and validate this estimate with proprietary data. We then investigate whether the value that investors assign to a firm’s cash holdings depends upon the location of those cash holdings. We find that the value of cash is decreasing in the level of foreign cash holdings and that this decrease is statistically more negative compared to the level of domestic cash holdings. Specifically, a one standard deviation increase in foreign cash holdings (domestic cash holdings) decreases the value of an additional dollar of cash by 15.7 (5.9) cents. We also document that this effect is driven by cash held in countries that are subject to greater instability and corruption, weaker legal protections, and greater tax costs. Overall, our results suggest that investors behave as if foreign cash balances in uncertain business environments and/or tax havens are subject to greater liquidity concerns.

Authors

• John L. Campbell, The University of Georgia

• Dan S Dhaliwal, The University of Arizona

• Linda K Krull, University of Oregon

• Casey M Schwab, The University of Georgia