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

Michael W. Faulkender, Kristine W. Hankins, Mitchell A. Petersen

NBER Working Paper No. 23799
Issued in September 2017, Revised in August 2018
NBER Program(s):Corporate Finance Program

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.

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Document Object Identifier (DOI): 10.3386/w23799

Published: Michael W Faulkender & Kristine W Hankins & Mitchell A Petersen, 2019. "Understanding the Rise in Corporate Cash: Precautionary Savings or Foreign Taxes," The Review of Financial Studies, vol 32(9), pages 3299-3334.

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