Prior research has documented that current U.S. corporate tax laws create incentives for some U.S. multinational corporations (MNC) to delay repatriation of foreign earnings in order to defer taxation on those earnings and hold greater amounts of cash abroad. The current financial accounting treatment for taxes on foreign earnings under ASC 740 potentially exacerbates this issue and increases the incentive to avoid the repatriation of foreign earnings by allowing firms to designate foreign earnings as permanently reinvested and to defer the recognition of the U.S. tax expense related to foreign earnings for financial reporting purposes. In our paper, Permanently Reinvested Earnings and the Profitability of Foreign Cash Acquisitions, which was recently made publicly available on SSRN, we predict and document that the combined effect of these tax and financial reporting incentives likely lead to significant agency costs. Namely, managers of U.S. MNCs with high levels of both permanently reinvested earnings and cash holdings are more likely to make value-destroying acquisitions of foreign target firms. Our findings are consistent with anecdotal evidence from the popular press. For example it has been suggested that a significant determinant of Microsoft’s decision to acquire Skype for $8.5 billion was that Skype was a foreign company with headquarters in Luxemburg, enabling Microsoft to use foreign cash “trapped” overseas to make the acquisition (Bleeker 2011).

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