CASH HOLDING, INCOME SHIFTING AND TAX.

This paper examines the effect of different tax rates (domestic and foreign) on cash holdings between multinational firms and non-multinational firms. Our major findings are: 1) multinational firms' cash holdings level (cash-to-asset ratio) is affected by both the domestic tax rates and the foreign tax rates. The higher the domestic tax rates and/or foreign tax rates, the lower the cash held by the multinational firms. 2) Domestic tax rates negatively affect non-multinational firms' cash holdings level. The higher the domestic tax rates, the lower the holding of cash (cash-to-asset ratio); 3) Compared to non-multinational firms, multinational firms' cash holding is less affected by domestic tax rates; 4) Multinational firms tend to shift income from US to foreign countries when domestic tax rates are higher than foreign tax rates. 5) Among multinational firms, those with higher proportion of income in foreign countries tend to have higher levels of cash holdings when domestic tax rates are higher than the foreign tax rates. Our findings are also consistent with the precautionary motive of cash holding for the non-multinational firms. i.e. those smaller, and hence more likely to be financially constrained firms, are more likely to hold more cash. [ABSTRACT FROM AUTHOR]