The Persistence and Pricing of Changes in Multinational Firms’ Foreign Cash Holdings

Using a hand-collected sample of U.S. multinational firms’ foreign and domestic cash holdings, we evaluate the association between changes in foreign and domestic cash holdings and one-yearahead earnings. Because changes in cash are components of cash flows which itself is a component of earnings, a higher coefficient on the change in cash component is interpreted as higher earnings persistence. In contrast to the common belief that accumulating cash in foreign subsidiaries is suboptimal, we find that changes in foreign cash are as persistent for future earnings as changesin domestic cash. However, there exists predictable cross-sectional variation. Foreign cash changes have higher earnings persistence when foreign operations offer better growth opportunities and when repatriation taxes are lower. Additional analysis suggests that the persistence of foreign cash is at least partially due to retained foreign cash being reinvested into foreign operations. The persistence result is robust to controlling for the voluntary nature of foreign cash disclosure. Our second analysis investigates whether investors efficiently price the earnings persistence implications of changes in foreign and domestic cash. Our results suggest that investors underreact to changes in foreign cash holdings, and this under-reaction is concentrated in firms for which investors are more likely to misunderstand the amount and nature of foreign cash, and in firms with lower analyst coverage.