Non-arm's-length transactions, offshore financial centres, transfer pricing agreements and corporate cash holdings: Evidence from U.S. multinational corporations

Baban Eulaiwi · Satam Salih Hussein · Lien Duong · Grantley Taylor

11 citations0/0 files storedInternational Review of Financial Analysis

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Corporate Taxation and Avoidance Corporate Finance and Governance Taxation and Legal Issues

Abstract

This paper examines the association between non-arm's-length transactions, the existence of offshore financial centres, the existence of a transfer pricing agreement and corporate cash holdings for a large sample of U.S. multinational corporations over the 2006–2020 period. This study provides evidence that the existence of non-arm's-length transactions and of offshore financial centres increased the level of corporate cash holdings. In contrast, the existence of a transfer pricing agreement reduces the level of firm cash holdings. Overall, these results suggest that development of transfer pricing agreements with taxing authorities reduces multinational corporations' incentives and capacity to shift profits from higher- to lower-tax countries. These results remain robust to alternative specifications of cash holdings and endogeneity tests. • This paper examines the association between non-arm's-length transactions, the existence of offshore financial centres, the existence of a transfer pricing agreement and corporate cash holdings for a large sample of U.S. multinational corporations over the 2006–2020 period. This study provides evidence that. • The existence of non-arm's-length transactions and of offshore financial centres increased the level of corporate cash holdings. • In contrast, the existence of a transfer pricing agreement reduces the level of firm cash holdings. • Overall, these results suggest that development of transfer pricing agreements with taxing authorities reduces multinational corporations' incentives and capacity to shift profits from higher- to lower-tax countries. • These results remain robust to alternative specifications of cash holdings and endogeneity tests.

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1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1999The determinants and implications of corporate cash holdings 2009Why Do U.S. Firms Hold So Much More Cash than They Used To?2005Corporate tax avoidance and high-powered incentives 2011Corporate tax avoidance and stock price crash risk: Firm-level analysis 2006Corporate governance and the value of cash holdings 1999Corporate Cash Reserves and Acquisitions 1998The Determinants of Corporate Liquidity: Theory and Evidence

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