The Valuation Consequences of U.S. Multinational Corporations' Foreign Cash Holdings

Abstract

U.S. multinationals hold cash balances across multiple countries with differing business and tax environments. Regulators are concerned that current cash disclosures do not reflect these differences. This study develops an estimate of the location of firms’ cash holdings, validates this estimate with proprietary data, and investigates whether investors differentially value cash holdings based on their location. We find that investors place a lower value on an incremental dollar of cash when firms have higher levels of foreign cash holdings. Further, we find that this effect is associated with cash held in tax haven countries, but is not related to cash held in countries subject to political instability, corruption, or weak legal protections. Our results suggest that a one standard deviation increase in foreign cash held in tax havens (domestic cash holdings) decreases the value of an additional dollar of cash by 15.8 (3.8) cents. This result is stronger when firms have more sophisticated investors. Overall, our findings suggest that investors at least partially estimate the location of cash, determine that cash held in some countries is unlikely to be fully realizable, and discount that cash accordingly.