Foreign Cash: Taxes, Internal Capital Markets, and Agency Problems
Jarrad Harford, Cong Wang, Kuo Zhang
The Review of Financial Studies (2017) 30 (5): 1490-1538
#002356 20170527 (published)
When the fraction of a firm’s cash held overseas is greater, its shareholders value that cash lower. This goes beyond a pure tax effect: the repatriation tax friction disrupts the firm’s internal capital market, distorting its investment policy. Firms underinvest domestically and overinvest abroad. Our findings are more pronounced when firms are subject to higher repatriation tax rates, higher costs of borrowing, and more agency problems. Overall, our evidence suggests that a combination of taxes, financing frictions, and agency problems leads to a valuation discount for foreign cash and documents real effects of how foreign earnings are taxed.
JEL-Codes: G32; G34
Keywords: Cash trapped overseas, Value of foreign cash, Repatriation cost, Domestic investment-cash flow sensitivity