The Effect of Repatriation Tax Costs on U.S. Multinational Investment

50 Pages Posted: 26 May 2014 Last revised: 9 Jun 2014

See all articles by Michelle Hanlon

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Rebecca Lester

Stanford Graduate School of Business

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

Date Written: May 23, 2014

Abstract

This paper investigates whether the U.S. repatriation tax for U.S. multinational corporations (MNCs) affects foreign investment. Prior research shows that repatriation tax costs are positively associated with cash overseas, but the use of such cash is not well understood. Our results show that the locked-out cash due to repatriation tax costs is associated with a higher likelihood of foreign (but not domestic) acquisitions. We also find that the market reaction to an announcement of foreign acquisitions is more negative for firms with more locked-out cash. These results highlight an unintended consequence of U.S. tax policy on worldwide investment activity.

Keywords: Cash, Investment, Tax

JEL Classification: M40, G34, H25, F23

Suggested Citation

Hanlon, Michelle and Lester, Rebecca and Verdi, Rodrigo S., The Effect of Repatriation Tax Costs on U.S. Multinational Investment (May 23, 2014). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2441529 or http://dx.doi.org/10.2139/ssrn.2441529

Michelle Hanlon (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-668
Cambridge, MA 02142
United States
617-253-9849 (Phone)

Rebecca Lester

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

HOME PAGE: http://www.gsb.stanford.edu/faculty-research/faculty/rebecca-lester

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
100 Main Street E62-666
Cambridge, MA 02142
United States
(617) 253 2956 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
739
rank
32,523
Abstract Views
3,269
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information