Foreign cash, repatriation, and credit ratings: Evidence from U.S. multinationals

Abstract

U.S. multinationals hold record-high foreign cash levels and commit not to repatriate foreign cash “in the foreseeable future” to qualify for deferring tax. We argue that such commitments reveal firms’ private information of short-term financial health and thus is a positive factor in credit risk assessments. Using a sample of listed U.S. multinationals in 2009-2016, we document a positive correlation between foreign cash holdings and credit ratings, confirming that rating agencies positively perceive foreign cash holdings. We further find that the positive correlation is stronger in firms with low repatriation costs, in firms that operate in fewer foreign countries, and in firms with poorer financial reporting quality. Our results still hold when applying different identification strategies, reducing the likelihood that our results are purely driven by endogeneity bias.