The Review of Financial Studies
When the fraction of a firm's cash held overseas is greater, its shareholders value that cash lower. This goes beyond a pure tax effect: the repatriation tax friction disrupts the firm's internal capital market, distorting its investment policy. Firms underinvest domestically and overinvest abroad. Our findings are more pronounced when firms are subject to higher repatriation tax rates, higher costs of borrowing, and more agency problems. Overall, our evidence suggests that a combination of taxes, financing frictions, and agency problems leads to a valuation discount for foreign cash and documents real effects of how foreign earnings are taxed.
Most US multinational companies park their foreign earnings in jurisdictions with favourable tax policies in order to reduce their tax bill. For example, Ireland charges 12.5 % corporation tax while in the US it’s 35 %. If a multinational wants to repatriate foreign cash back to the US they need to pay the tax difference. CEIBS Prof. Cong Wang explains this taxation problem and predicts how Trump’s administration might help solve the problem.
Prof. Wang and his co-authors, Prof. Jarrad Harford of University of Washington and Kuo Zhang of Xiamen University, looked at a sample of US-listed multinational firms that disclose their foreign cash holdings. The findings show that the more cash a firm holds overseas, the lower shareholders value that cash. The researchers also found that firms with large cash holdings overseas tend to under-invest domestically and over-invest abroad.
ABACUS-A JOURNAL OF ACCOUNTING FINANCE AND BUSINESS STUDIES
Using a sample of non-state-owned enterprises (NSOEs) in China, we investigate the impact of social trust on firms' access to bank loan financing. We find that privately controlled firms in trust-intensive regions are more likely to obtain loans from banks than those in regions with a lower level of social trust. The positive effect of trust on access to bank loans is more pronounced for firms that have no political connections, firms that are located in regions with poor legal environments, and firms that hire less reputable auditors. We also examine the channels through which social trust promotes bank finance. The results show that firms in trust-intensive regions have a lower likelihood of default and higher financial reporting quality. Finally, we find that loans to NSOEs in trust-intensive regions are associated with fewer collateral requirements, longer maturity, and lower interest rate spread. Overall, these findings suggest that social trust alleviates lenders' concerns regarding moral hazard and plays an important role when NSOEs raise capital from the bank loan market.