Linda K. Krull

Is U.S. Multinational Dividend Repatriation Policy Influenced byReporting Incentives

This study finds evidence that public-company reporting by U.S. multinational corporations (MNCs) creates disincentives to repatriate foreign earnings to the U.S. and contributes to the accumulation of cash abroad. MNCs operate under U.S. international tax laws and financial reporting rules and face two potential consequences when they repatriate foreign earnings: a cash payment for repatriation taxes and a reduction in reported accounting earnings. Using a confidential dataset of financial and operating characteristics of foreign affiliates of MNCs combined with public-company data, we examine how repatriation amounts vary across firms that face relatively strong reporting incentives to defer an accounting expense. Our results suggest that reporting incentives reduce repatriations by about 17 to 21 percent annually.

The Location, Composition, and Investment Implications of Permanently Reinvested Earnings

This study uses permanently reinvested earnings (PRE) reported in U.S. multinational corporations (MNCs) financial statements, combined with detailed information on foreign affiliate assets to estimate the location and composition of PRE. We use these estimates to gain an understanding of the motivations for PRE designations, and thus implications of reported PRE for firms’ growth and liquidity, as well as the potential effects of U.S. tax reform. Our analysis suggests that PRE designations are driven by earnings incentives and growth – 94 percent of PRE is located in affiliates that would require recognition of an expected repatriation tax expense, and 60 percent of PRE is in high growth affiliates. While our estimates suggest that most PRE are associated with unrecognized repatriation tax obligations, the existence of some PRE in high tax jurisdictions reduces the potential tax revenue associated with PRE. We also find that, for firms in overall non-binding foreign tax credit positions, a significantly greater proportion of PRE in low-tax jurisdictions is held in cash, relative to high-tax jurisdictions, suggesting liquidity implications arising from the current tax system.

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.

Tax and the Cost of Equity Capital: An International Analysis

This paper investigates the association between taxes and the cost of equity capital in an international setting that allows for exogenous, cross-sectional variation in corporate and investor tax rates. Using a sample of firms from 33 countries over a 21-year period, we find that the cost of equity capital increases in leverage. This effect decreases in the corporate tax rate as well as the personal tax penalty on interest income relative to equity income, though the significance of this latter result is sensitive to model specification. Further, we find that the cost of equity capital increases in tax penalized dividend income and that cross-border equity investments affect the relation between taxes and the cost of equity capital. In sum, we offer further and confirming evidence, in an international setting, that taxes impact the cost of equity capital.

R&D and the Rising Foreign Profitability of U.S. Multinational Corporations

We investigate how R&D contributes to rising foreign profitability in U.S. multinational corporations (MNCs) through wage savings and tax incentives. Our results suggest that wage savings increase foreign profit margins attributable to foreign R&D, while tax incentives increase foreign profit margins attributable to domestic R&D. By exploring their relative importance, we find that wage savings are more important than tax incentives in explaining foreign profit margins when the wage discount substantially exceeds the tax differential, and vice versa. Cross-sectional tests show that the effect of foreign R&D wage savings increases with access to local human talent and decreases with the cost of moving R&D abroad, and the effect of tax-motivated income shifting related to domestic R&D decreases with transfer pricing risk. Our evidence sheds light on the importance of R&D in corporate income shifting that separates the location of economic activity from the location of reported taxable income.

Are 'Tax Aggressive' Firms Just Inflating Earnings?

We investigate whether low Cash ETRs are associated with two distinct effects — tax avoidance and low earnings quality — and if so, whether the two effects can be separated. Separating these effects is important: if upward earnings management is driving low Cash ETRs, inferences based on tax avoidance may not be valid. Our results demonstrate Cash ETRs are associated with both earnings quality and tax avoidance. We test an alternative measure, the ratio of cash taxes paid to pretax operating cash flows, and provide evidence that this measure mitigates the association with earnings quality while retaining the association with tax avoidance.