Firm-Specific Currency Exposure, Repatriation, and the Market Value of Repatriation Taxes

What is it about?

Our study demonstrates that changes in foreign currency strength create a timing asymmetry between the value of foreign-to-parent dividends and the foreign tax credit associated with the dividend. The main findings provide evidence that managers use this asymmetry to time repatriations of foreign earnings, and equity investors price this asymmetry in firm value. Investors place a premium on repatriation costs when the U.S. dollar strengthens against a firm-specific basket of currencies. Because the after-tax dividend is dependent on firms' foreign currency exposure, our results are relevant to the Tax Cuts and Jobs Act of 2017. Specifically, actual revenues from future repatriations may be less than estimated. Our study also is important to the literature that examines equity investors' use of tax-related information in the financial statements. Finally, we create a measure of firm-specific currency exposure that may be used in future studies.

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