TY  - CHAP
AB  - Abstract In this chapter we analyze how the designation of foreign earnings as “permanently reinvested” outside the US (PRE) is related to subsequent firm growth and market returns. Prior research suggests that firms that hold excess cash in foreign markets to avoid the US corporate income tax experience lower growth, since such “trapped” cash is inefficiently invested. However, foreign earnings can be inefficiently invested in forms other than cash. We hypothesize and find that as the ratio of PRE to total assets increases, firms' growth rates decline. Our results suggest that trapped earnings, and not just trapped cash, are associated with lower growth. Because PRE have also been associated with earnings management in the literature, we further analyze the association between the use of PRE to meet or beat earnings targets and subsequent growth, observing a significant and persistent negative association. Finally, we note that the market discount for PRE, and especially for the use of PRE to manage earnings, appears to be relatively small. Our results provide support for FASB's stated plans to increase disclosure requirements surrounding the tax accrual.
VL  - 28
SN  - 978-1-80043-327-4, 978-1-80043-326-7/1058-7497
DO  - 10.1108/S1058-749720200000028004
UR  - https://doi.org/10.1108/S1058-749720200000028004
AU  - Furner Zhan
AU  - Morrow Michaele L.
AU  - Ricketts Robert C.
ED  - John Hasseldine
PY  - 2020
Y1  - 2020/01/01
TI  - The Use of Tax Accruals to Fool the Market: The Case of PRE before the Tax Cuts and Jobs Act
T2  - Advances in Taxation
T3  - Advances in Taxation
PB  - Emerald Publishing Limited
SP  - 101
EP  - 126
Y2  - 2024/09/22
ER  -