Territorial Tax System Reform and Corporate Financial Policies
Review of Financial Studies, Forthcoming
48 Pages Posted: 12 Oct 2012 Last revised: 23 Dec 2014
Date Written: December 1, 2014
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: Suggested Citation