Abstract Current U.S. reporting and tax laws create an incentive for some U.S. firms to avoid the repatriation of foreign earnings, as the U.S. government charges additional corporate taxes on these transfers. Prior research suggests that the combined effect of these incentives leads some U.S. multinational corporations to hold a significant amount of cash overseas. In this study, we investigate the effect of cash trapped overseas on U.S. multinational corporations' foreign acquisitions. Consistent with expectations, we observe firms with high levels of trapped cash make less profitable acquisitions of foreign target firms using cash consideration (lower announcement window returns, lower buy and hold returns, decreased ROA ). The American Jobs Creation Act of 2004 (AJCA) reduced this effect by allowing firms to repatriate foreign earnings held as cash abroad at a much lower tax cost. Our study has implications for current proposals to change the tax laws related to foreign earnings.

ABSTRACT We investigate the association between financial constraints and cash savings generated through tax planning. We predict that an increase in financial constraints leads firms to increase internally generated funds via tax planning. We measure financial constraints based on changes in firm-specific and macroeconomic measures. We find that firms facing increases in financial constraints exhibit increases in cash tax planning. Our results indicate that among profitable firms, firm-years with the largest increases in firm-specific constraints are associated with declines in firms' cash effective tax rates ranging from 3.00 to 5.14 percent, which equate to between 2.87 and 4.82 percent of operating cash flows. We also find that (1) the impact of financial constraints on tax planning is greatest among firms with low cash reserves, and (2) constrained firms achieve a substantial portion of their current tax savings via deferral-based tax planning strategies, despite the lack of a financial statement benefit. JEL Classifications: E69; H25; H60. Data Availability: Data used in this study are available from public sources identified in the paper.