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

Review of Accounting Studies Forthcoming

54 Pages Posted: 3 Jun 2019 Last revised: 13 Dec 2021

See all articles by Novia (Xi) Chen

Novia (Xi) Chen

University of Houston - Department of Accountancy & Taxation

Peng-Chia Chiu

The Chinese University of Hong Kong, Shenzhen

Terry J. Shevlin

University of California-Irvine; University of California-Irvine

Date Written: December 6, 2021

Abstract

Using a hand-collected sample of U.S. multinational firms’ foreign and domestic cash holdings, we evaluate the earnings persistence implications of changes in foreign and domestic cash and whether stock prices reflect such implications. Building on the earnings decomposition approach in Dechow, Richardson, and Sloan (2008), we find that, in the overall sample, changes in foreign cash are as persistent for future earnings as changes in domestic cash. In the cross-section, we find that foreign cash changes have higher persistence when foreign operations offer better growth opportunities and when repatriation taxes are lower. We then examine whether investors correctly price the persistence implications of foreign and domestic cash changes. We find a positive association between current foreign cash changes and one-year-ahead stock returns, suggesting that investors underreact to foreign cash changes, or equivalently, underestimate the earnings persistence of foreign cash changes. We further document that investors are more likely to misprice foreign cash changes when information processing costs are higher and when firms have poorer information environments. Our study sheds light on a recent paper, Harford, Wang, and Zhang (2017), who find that investors discount foreign cash changes, which they attribute to agency costs and investment inefficiencies. Our findings suggest that the discount is more likely due to investor mispricing of foreign cash changes.

Keywords: U.S. multinational firms, Foreign cash holdings, Earnings persistence, Investor mispricing

Suggested Citation

Chen, Novia (Xi) and Chiu, Peng-Chia and Shevlin, Terry J. and Shevlin, Terry J., The Persistence and Pricing of Changes in Multinational Firms' Foreign Cash Holdings (December 6, 2021). Review of Accounting Studies Forthcoming, Available at SSRN: https://ssrn.com/abstract=3388358 or http://dx.doi.org/10.2139/ssrn.3388358

Novia (Xi) Chen (Contact Author)

University of Houston - Department of Accountancy & Taxation ( email )

Bauer College of Business
4800 Calhoun Road
Houston, TX 77204
United States

Peng-Chia Chiu

The Chinese University of Hong Kong, Shenzhen ( email )

Terry J. Shevlin

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA 92697-3125
United States
949-824-6149 (Phone)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
256
Abstract Views
1,616
rank
163,843
PlumX Metrics