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

Abstract

As the U.S. dollar (USD) strengthens relative to foreign currencies, the USD value of foreign subsidiary-to-parent dividends decreases, and the foreign tax credit remains anchored at a blended rate. During periods of USD strength, this asymmetry lowers the effective tax cost of repatriation at the cost of a lower after-tax dividend to the U.S. parent. This paper develops a firm-specific measure of currency exposure and provides evidence that repatriation likelihood increases during periods of firm-specific USD strength. We show that investors place a premium on repatriation costs when the USD strengthens against a firm-specific basket of currencies for repatriating firms. This premium implies that investors value the benefit of a lower effective tax cost of repatriation more than the potential cost of a lower after-tax dividend available to the U.S. parent. These results appear concentrated in firms with high levels of foreign cash and firms susceptible to earnings fixation.