Abstract
In the presence of market frictions, it is optimal for firms to stockpile cash to fund investment projects which may arise in the future. Prior work has documented that firms’ precautionary savings motives predict variation in the size of firms’ cash stockpiles. The dramatic run-up in cash stockpiles raises the question of why these precautionary motives have increased. In the presence of repatriation taxes, foreign and domestic cash are imperfect substitutes. We show that although precautionary motives explain variation in the level of cash held domestically, they provide little explanatory power for the level of foreign cash. Multinational firms’ foreign cash balances are instead explained by low foreign tax rates and the ability to transfer profits within the firm through related-party sales. The firms with the greatest incentive and ability to transfer income to low-tax jurisdictions do so, and this results in stockpiles of cash trapped in their foreign subsidiaries.
Document Type
Research Paper
Publication Date
3-2017
Working Paper Number
Working Paper 2
Repository Citation
Faulkender, Michael W.; Hankins, Kristine W.; and Petersen, Mitchell A., "Understanding Precautionary Cash at Home and Abroad" (2017). Institute for the Study of Free Enterprise Working Papers. 27.
https://uknowledge.uky.edu/isfe_papers/27
