Understanding the Rise in Corporate Cash: Precautionary Savings or Foreign Taxes

Has the need for precautionary savings driven the dramatic increase in U.S. corporate cash? We show that the run-up in cash is concentrated in foreign subsidiaries of multinational corporations. Precautionary motives explain variation in the level of cash held domestically, but not the level or growth of foreign cash. Multinational firms’ foreign cash balances are instead explained by low foreign tax rates and the ability to transfer profits within the firm through among related subsidiaries. The firms with the greatest incentive and ability to transfer income to low tax jurisdictions do, causing cash to accumulate in their foreign subsidiaries.