Taxes and Financial Assets: Valuing Permanently Reinvested Foreign Earnings

We investigate the value of permanently reinvested earnings (PRE) of foreign subsidiaries of U.S. multinationals. We focus particularly on how firm value is affected by reinvesting PRE in financial rather than operating assets, where the reinvestment in financial assets is to avoid the U.S. repatriation tax. Consistent with prior studies, we find that the value of PRE is lower for those firms that disclose a positive U.S. tax associated with repatriation of PRE. Consistent with our hypothesis, we find that this lower value is concentrated in the subset of firms with high amounts of excess cash, our proxy for tax-related reinvestment in financial assets.