The Disclosure and Valuation of Foreign Cash Holdings

Abstract

This paper studies the disclosure and valuation of foreign cash holdings using hand-collected data from 2010 to 2013. The SEC has been commenting on foreign cash in its review of 10-K filings since 2011. I find that the SEC tends to target big firms with limited growth and high permanently reinvested earnings. Conditional on the SEC’s comment, firms with Big 4 auditors are more likely to disclose foreign cash holdings, but firms with a CEO who is also the Chairman and more free cash flow are less likely to disclose. I find no evidence that the value of foreign cash is discounted relative to domestic cash on average, although the value of foreign cash decreases in foreign cash level. Furthermore, foreign cash is less valuable when firms only disclose limited foreign operations in Exhibit 21 relative to the overseas operations collected by the OSIRIS international database and when firms operate in more foreign countries, but more valuable when the U.S. parent controls the decision-rights of foreign subsidiaries and when foreign growth opportunities are higher. There is no evidence that proxies for the repatriation tax are negatively associated with the value of foreign cash. I also examine market reactions to the Treasury Department’s recent crackdown on tax inversions.