The relation among trapped cash, permanently reinvested earnings, and foreign cash

Stacie K. Laplante and Wayne L. Nesbitt

Journal of Corporate Finance, 2017, vol. 44, issue C, 126-148

Abstract: We investigate the relation among trapped cash, permanently reinvested earnings, and foreign cash. We define trapped cash as cash and cash equivalents generated by foreign earnings and held by U.S. MNC's foreign subsidiaries due to concerns over repatriation taxes, and explain why trapped cash, permanently reinvested earnings, and foreign cash are not synonymous. We exploit the one-time tax rate reduction on repatriated earnings provided for under the American Jobs Creation Act of 2004 to construct a proxy to identify firms with trapped cash. We find R&D intensity, capital intensity, foreign growth opportunities and tax haven subsidiaries are significant indicators of trapped cash. Interestingly, we find firms with tax haven operations are less likely to have trapped cash. These findings highlight the joint role of tax havens as low-tax jurisdictions and offshore financial hubs. Finally, we investigate the relation between firm value and trapped cash. Controlling for excess cash, we find that trapped cash is negatively related to firm value, but primarily for firms with poor governance. Overall, results suggest that our measure is a parsimonious way to estimate the likelihood of having trapped cash that can be applied to a large sample of firms.

Keywords: Trapped cash; Tax planning; Multinational corporations (search for similar items in EconPapers)
JEL-codes: G38 H25 H32 M41 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:44:y:2017:i:c:p:126-148

DOI: 10.1016/j.jcorpfin.2017.03.005

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