Why do multinational firms hold so much cash? Further evidence on the precautionary motive

Abstract

This study investigates effects of firm structure and risk exposure on cash holdings of multinational firms. We show that multinational firms that hold high levels of cash are stand-alone firms that operate businesses in one segment, but not diversified firms that operate businesses in multiple segments; the high levels of cash in multinational stand-alone firms are associated with their risk exposure to market uncertainty, policy uncertainty, and economic uncertainty. These risk exposures also have significant impact on future cash holdings, as well as current and future R&D expenditures. Our findings suggest that the precautionary motive still plays a key role in explaining the high cash holdings of multinational firms. In addition, we provide evidence that the tax motive is not sufficient to explain the high level of cash holdings in multinational stand-alone firms.