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
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: Suggested Citation