Corporate Governance and Extraordinary Earnings Repatriations: Evidence from the American Jobs Creation Act
Stockholm School of Economics
April 3, 2012
AFA 2010 Atlanta Meetings Paper
The American Jobs Creation Act of 2004 temporarily reduced the repatriation tax rate on U.S. multinational firms' foreign earnings by 85%. Consequently, approximately $300 billion previously held as cash in foreign subsidiaries were repatriated to the U.S. -- about five times more than in prior years. This study employs this tax holiday and the resulting cash windfall as a natural experiment to study the effect of agency problems on acquisition decisions by firms. I find that shareholders of weakly-governed multinational U.S. firms -- unlike those of well-governed companies -- reacted negatively to the passage of the Act. After the tax holiday, acquisitions by weakly-governed repatriating firms (relative to their well-governed peers) significantly increased. Compared to well-governed firms, acquisitions by weakly-governed firms were more likely to be diversifying and were accompanied by lower abnormal announcement returns. These results are consistent with empire-building models of managerial behavior and suggest that managers protected by more anti-takeover provisions may have used a significant fraction of the repatriated funds to indulge in corporate expansion plans with limited benefits to their shareholders.
Number of Pages in PDF File: 41
Keywords: American Jobs Creation Act, tax holiday, repatriations, corporate governance, tax policy
JEL Classification: F23, G3, G14, G18, H25, H32working papers series
Date posted: December 7, 2008 ; Last revised: April 5, 2012
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