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Review of Financial Studies Vol. 32 No. 9 2019

Understanding the Rise in Corporate Cash: Precautionary Savings or Foreign Taxes

Michael W. Faulkender1; Kristine W. Hankins2; Mitchell A. Petersen3

1 University of Maryland · 2 University of Kentucky · 3 Northwestern University, National Bureau of Economic Research

Abstract

What has driven the dramatic rise in U.S. corporate cash? Using non-public data, we show that the run-up is not uniform across firms but is concentrated in the foreign subsidiaries of multinational firms. Standard precautionary motives explain only domestic cash holdings, not these burgeoning foreign cash balances. Falling foreign tax rates, coupled with relaxed restrictions on income shifting, are the root of the changing foreign cash patterns. Firms with intellectual property have the greatest ability to shift income to low tax jurisdictions, and their foreign subsidiaries are where we observe the largest accumulations of cash. Received September 6, 2017; editorial decision August 22, 2018 by Editor David Denis.

DOI
10.1093/rfs/hhz003
Volume
32
Issue
9
Pages
3299-3334
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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