Casey M. Schwab

U.S. Multinational Corporations’ Foreign Cash Holdings: An Empirical Estimate and Its Valuation Consequences

U.S. multinationals hold cash balances across multiple countries with differing business and tax environments. Regulators are concerned that current cash disclosures do not reflect these differences. This study develops an estimate of the location of firms’ cash holdings, validates this estimate with proprietary data, and investigates whether investors differentially value cash holdings based on their location. We find that investors place a lower value on an incremental dollar of cash when firms have higher levels of foreign cash holdings. Further, we find that this effect is associated with cash held in tax haven countries, but is not related to cash held in countries subject to political instability, corruption, or weak legal protections. Our results suggest that a one standard deviation increase in foreign cash held in tax havens (domestic cash holdings) decreases the value of an additional dollar of cash by 15.8 (3.8) cents. This result is stronger when firms have more sophisticated investors. Overall, our findings suggest that investors at least partially estimate the location of cash, determine that cash held in some countries is unlikely to be fully realizable, and discount that cash accordingly.

Does Tax Deferral Enhance Firm Value

Recent research provides evidence that corporate tax departments and tax directors have incentives to reduce financial statement effective tax rates, but little or no incentive to reduce cash taxes paid. The lack of managerial incentives to reduce cash taxes paid provides a stark contrast to the benefits of tax deferral espoused by tax professionals and academics, raising the question: Does tax deferral actually enhance firm value? We examine whether the difference between financial statement tax expense and current taxes paid (i.e., current year tax deferral) is associated with a firm’s change in future profitability and market returns. We find positive associations between current year tax deferral and both the change in next period profitability and stock returns in months around the Form 10-K release date. We also find that these associations increase for firms with greater investment opportunities, financial constraints, and, to a lesser extent, strong corporate governance. These results suggest both profitability and market return benefits associated with tax deferral, consistent with tax deferral enhancing firm value.

The Incidence, Valuation, and Management of Tax-Related Reputational Costs:Evidence from Negative Media Attention During Periods Characterized by High Scrutiny of Corporate Tax Avoidance

We examine the incidence, valuation and management of tax-related reputational costs during 2011, a year containing numerous protests that increased scrutiny of corporate tax avoidance. We report three main results. First, consistent with firms incurring tax-related reputational costs, we find that tax avoidance is positively associated with negative media sentiment during the protest period (i.e., 2011). Second, consistent with tax-related reputational costs reducing firm value, we find that a hedge portfolio long (short) in low (high) tax avoidance firms generates significant positive abnormal returns during the protest period. Third, consistent with firms managing reputational damage, we find that firms experiencing the largest reputational costs during the protest period exhibit higher tax rates in the following years. In supplemental analyses, we provide assurance that our results are due to reputational costs and not political costs by re-estimating our analyses after excluding firms operating in politically-sensitive industries; all inferences hold. We also conduct placebo analyses to confirm that our results only exist during the protest period. Collectively, this study provides evidence that firms incur tax-related reputational costs, but only during periods of increased scrutiny.