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Repatriation Taxes and the Value of Cash Holdings


U.S.-domiciled multinational firms are taxed on a worldwide basis under a credit and deferral system. Consequently, multinationals earning profits from low-tax foreign countries have incentives to delay the repatriation of foreign earnings, resulting in high levels of offshore cash holdings. I hypothesize and find that investors’ valuation of multinationals’ total cash holdings is negatively associated with firm-specific tax costs of repatriation. Using a hand-collected sample of firms that disclose their foreign and domestic cash holdings separately, I find that the documented effect is driven by firms that hold a majority of cash overseas. I propose three explanations for my main finding: (1) repatriation taxes contribute to the buildup of foreign cash that can be subject to agency problems; (2) repatriation taxes make foreign funds less accessible, thereby increasing internal financing frictions; (3) repatriation taxes motivate excessive investments in financial assets, for which the rate of return is usually lower than firms’ cost of capital. Cross-sectional results are consistent with all three explanations. Overall, this study provides new insights into the non-tax costs of multinationals’ sensitivity to taxation.

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