Foreign subsidiary cash holdings

Managers can voluntarily disclose cash holdings of foreign subsidiaries. This allows for the disaggregation of cash into domestic cash and foreign cash. This disaggregation is important to understanding the relation between firms' cash levels and future performance. While domestic cash has no restriction to its intended use, foreign cash is often trapped overseas as a result of current tax law in the United States. Trapped foreign cash can motivate managers to spend that cash on projects that may not be in the best interest to shareholders. However, it is also possible that firms face greater growth opportunities in foreign markets and managers use foreign cash to take advantage of these opportunities. The purpose of this study is to examine the implications of foreign cash on the future operating performance of the firm. I then examine the valuation of foreign cash and how that valuation depends on where firms' foreign subsidiaries are located. To the extent that foreign cash hinders future performance, I expect investors to discount foreign held cash. On the other hand, I expect investors to value foreign held cash at a premium if managers use foreign cash to gain market share as a result of exploiting foreign growth opportunities. Using a hand-collected sample of firms that disclose foreign cash, the results suggest that foreign cash is positively related to future performance when the firm is faced with costly financing at the foreign subsidiary level. On the other hand, foreign cash hinders future performance when the firm has greater foreign subsidiary agency costs and when the firm has a greater foreign presence in countries classified as tax havens. In extending the findings to the valuation of foreign cash, the results suggest that investors recognize these associations and value foreign cash at a premium when the firm faces greater financing costs and when there are growth opportunities in foreign operations, but value foreign cash at a discount when cash is located in foreign subsidiaries with greater agency costs.