Cash-Flow and Market Response to Repatriation

Abstract

The American Jobs Creation Act of 2004 (AJCA) provided a limited-time tax deduction for U.S. firms repatriating accumulated foreign earnings as cash dividends, and I study this natural experiment in corporate cash shocks. Consistent with theories of imperfect capital markets, firms did not use newly freed cash to return value to shareholders but instead increased acquisitions. Firms with strong management also increased executive compensation. In addition, firms raised debt and sold property to fund repatriations. Markets anticipated firm behavior, and firms ultimately choosing to repatriate were penalized in advance by a significant drop in value when the AJCA was enacted.

Keywords: AJCA, Jobs Creation Act, internal capital markets, agency problems, executive compensation

JEL Classification: E62, G14, G32