Foreign cash holdings and credit rating: Evidence from U.S. multinationals

Abstract

Using a sample of listed U.S. multinationals in 1999-2016, we document a positive correlation between foreign cash holdings and credit ratings, suggesting that firms may credibly signal their liquidity by accumulating large foreign cash reserves and pledging not to repatriate “in the foreseeable future”. Also, we find that this positive correlation is stronger in financially distressed firms, suggesting that the escalated signaling costs (e.g., an increased penalty in the case of cash shortages) in financially distressed firms amplify the signaling effect of foreign cash holdings, and thus, strengthen its positive impact on credit rating assessments. These two findings hold for an instrumental variable approach, reducing the likelihood of our results being purely driven by endogeneity bias. In additional analyses, we find that rating agencies are more conservative in discounting the value of foreign cash holdings when multinational firms are at the investment-grade cutoff and/or are subject to higher repatriation costs.