What Do Investors Infer About Future Cash Flows from Foreign Earnings for Firms with Low Average Foreign Tax Rates?

52 Pages Posted: 15 May 2015 Last revised: 27 Nov 2015

See all articles by Michelle L. Nessa

Michelle L. Nessa

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Terry J. Shevlin

University of California-Irvine; University of California-Irvine

Ryan J. Wilson

University of Iowa - Henry B. Tippie College of Business

Date Written: November 25, 2015

Abstract

This study examines whether investors discount the foreign earnings of U.S. multinational corporations in anticipation of future repatriation taxes. Investor pricing of repatriation taxes has become increasingly important because of the decline in foreign statutory tax rates relative to the U.S. statutory tax rate over the past twenty years combined with the increasing significance of foreign income for U.S. multinationals. Recent comments by regulators suggest they believe current disclosures related to potential repatriation taxes on foreign earnings are insufficient. Consistent with investors pricing repatriation taxes, we observe a significant difference in the earnings response coefficient on changes in foreign earnings of firms with low versus high average foreign tax rates. We also conduct a series of tests to examine whether investor expectations about the likelihood of future repatriation taxes vary as a function of certain firm characteristics. We find no evidence investors differentiate between low foreign tax rate firms based on the likelihood of repatriation.

Keywords: Earnings response coefficients, permanently reinvested earnings, reinvestment, growth, corporate governance

JEL Classification: G10, H25, H26

Suggested Citation

Nessa, Michelle L. and Shevlin, Terry J. and Shevlin, Terry J. and Wilson, Ryan J., What Do Investors Infer About Future Cash Flows from Foreign Earnings for Firms with Low Average Foreign Tax Rates? (November 25, 2015). Available at SSRN: https://ssrn.com/abstract=2606023 or http://dx.doi.org/10.2139/ssrn.2606023

Michelle L. Nessa

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States

Terry J. Shevlin

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA 92697-3125
United States
949-824-6149 (Phone)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

Ryan J. Wilson (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

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