Why do firms hold so much cash? A tax-based explanation / C. Fritz Foley, Jay C. Hartzell, Sheridan Titman, Garry Twite.

Format:

Book

Author/Creator:

Foley, C. Fritz.

Contributor:

National Bureau of Economic Research.

Hartzell, Jay C.

Titman, Sheridan.

Twite, Garry.

Series:

Working Paper Series (National Bureau of Economic Research) no. w12649.

NBER working paper series no. w12649

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2006.

Summary:

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.

Notes:

Print version record

October 2006.