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Territorial Tax System Reform and Corporate Financial Policies

Review of Financial Studies, Forthcoming

48 Pages Posted: 12 Oct 2012 Last revised: 23 Dec 2014

Matteo P. Arena

Marquette University

George W. Kutner

Marquette University - Department of Finance

Date Written: December 1, 2014

Abstract

We examine the effect of a permanent change to a country corporate income repatriation tax system on corporate financial policies. In 2009 Japan and the U.K. switched from a worldwide to a territorial system for the taxation of repatriated foreign earnings. The new system effectively reduces the tax liabilities of most multinational firms when repatriating earnings. We find that after the change firms accumulate less cash, pay out larger amounts through dividends and share repurchases, and invest less abroad. We do not find that the tax system change has significantly affected domestic investments even when controlling for capital constraints.

Keywords: Territorial tax system, worlwide tax system, repatriation taxes on corporate earnings, corproate taxes, cash holdings, corproate investments, payout policy, international finance

JEL Classification: F21, F23, G15, G31, G35

Suggested Citation

Arena, Matteo P. and Kutner, George W., Territorial Tax System Reform and Corporate Financial Policies (December 1, 2014). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2160954 or http://dx.doi.org/10.2139/ssrn.2160954

Matteo P. Arena (Contact Author)

Marquette University ( email )

College of Business Administration
P.O. Box 1881
Milwaukee, WI 53201-1881
United States

George W. Kutner

Marquette University - Department of Finance ( email )

College of Business Administration
P.O. Box 1881
Milwaukee, WI 53201-1881
United States

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