Do Foreign Cash Holdings Generate Uncertainty for Analysts?

Posted by MICHELE FABRIZI - Nov 16, 2021

The past two decades have witnessed an important rise in cash holdings by multinational corporations (MNC), with a significant proportion of such cash held by foreign subsidiaries and deemed to be in excess of what is needed by the firms to pursue their operations. A key concerned raised by legislators and the investment community is that MNCs do not disclose sufficient information on how much cash is held by foreign subsidiaries. According to a study from J.P. Morgan ‘understanding a company’s cash balances becomes more complicated when most of that cash is held abroad’ (Chasan, 2012) and, in 2014, PwC recommended that MNCs ‘disclose the cash balances held by the parent and foreign subsidiaries because this information is important in evaluating sources and uses of cash’ (PwC, 2014, p. 2).

In our paper recently published in EAR (, we investigate whether foreign cash holdings increase the complexity of analysts’ forecasting task, thereby affecting their earnings forecasts’ properties. In forecasting future earnings, analysts face uncertainty in understanding the firm’s economic situation, especially if cash is held by foreign subsidiaries – given that it may be subject to investment inefficiencies (Edwards et al., 2015), can be kept in low-return financial assets (e.g., Bryant-Kutcher et al., 2008) and can be invested sub-optimally (Bryant-Kutcher et al., 2008; Edwards et al., 2015; Hanlon et al., 2015). These arguments suggest that firms that hold larger amounts of foreign cash are likely to underperform compared with those that hold most of their cash domestically. Although analysts are considered sophisticated users of financial information (Schipper, 1991), the lack of disclosure surrounding the amount and location of foreign cash makes it difficult for them to anticipate and fully incorporate in their estimates the performance consequences of holding large percentages of foreign cash. This implies that the lack of disclosures of foreign cash holdings restricts financial analysts’ ability to fully analyze its effect on future earnings. For these reasons, we expect foreign cash holdings to be associated with forecasts that are less accurate and more dispersed as earnings are less predictable and there is greater disagreement in analysts’ beliefs about the firms’ future performance. Moreover, the lack of disclosure might impair analysts’ ability to incorporate the lower earnings expectation in their forecasts, resulting in forecasts that are positively biased.

We test our research question using a large sample of U.S. multinational firms and focus on the accuracy and dispersion of analysts’ forecasts to proxy for information uncertainty among analysts (Beuselinck et al., 2010; Deru and Reeb, 2002).

Results show that an increase in the amount of estimated foreign cash is associated with forecasts that are less accurate and more dispersed. In addition, we find that estimated foreign cash is associated with lower future performance and with forecasts that are positively biased, consistently with the idea that the lack of disclosure restricts financial analysts’ ability to fully incorporate in their estimates the effect of foreign cash on future earnings. In additional analyses, we find that, for firms providing voluntary disclosure on foreign cash balances, the amount of the estimated foreign cash affects analyst forecast accuracy and dispersion to a lower extent compared to firms that do not provide such disclosure and that once a firm repatriates foreign cash, analyst uncertainty decreases due to the lower amount of cash held by foreign subsidiaries. This is consistent with the idea that firms repatriate cash that is held in foreign subsidiaries without a productive use, hence lowering the uncertainty around the remaining foreign cash.

Overall, our analyses document that foreign cash holdings represent a unique source of uncertainty for financial analysts that make more complex their forecasting task.



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