AAA Spark Meeting of Regions

Foreign Cash Holdings and the Agency Costs of Debt

• In Event: Taxation, Creditors, and Owners

Abstract

We examine the relation between foreign cash holdings and the agency costs of debt. We posit and provide evidence of a positive relation. Next, we investigate how recent tax legislation affects this relation. We find a significant decline in the positive relation between foreign cash holdings and the agency costs of debt following the Tax Increase and Prevention Act of 2005 (TIPRA), but we fail to find a decline after the Tax Cuts and Jobs Act of 2017 (TCJA). We conclude that foreign cash holdings increase the agency costs of debt more than domestic cash holdings and that some actions by lawmakers have resulted in the attenuation of these costs. Our paper adds to the literature investigating the consequences of multinational companies' foreign cash balances and provides insights on the benefits of recent legislative action on providing a more competitive balance to U.S. multinational companies.

Authors

• Matthew Erickson, Virginia Polytechnic Institute and State University

• Nathan Chad Goldman, North Carolina State University

• Linda K Krull, University of Oregon