Repatriation Taxes, Internal Agency Conflicts, and Subsidiary-level Investment Efficiency
59 Pages Posted: 26 Mar 2018 Last revised: 8 May 2019
Date Written: April 29, 2019
Using a global sample of multinational corporations (MNCs) and their foreign subsidiaries, we find that repatriation taxes impair subsidiary-level investment efficiency. Consistent with internal agency conflicts between the central management of the MNC and the manager of the foreign subsidiary being the driver, we find that this effect is prevalent in subsidiaries with high information asymmetry, in subsidiaries that are weakly monitored, and subsidiaries of cash-rich MNCs. Natural experiments in the UK and Japan establish a causal relationship for our findings and suggest that a repeal of repatriation taxes increases subsidiary-level investment efficiency while reducing the level of investment. Our paper provides timely empirical evidence to inform expectations for the effects of a recent change to the U.S. international tax law which eliminated repatriation taxes from most of the future foreign earnings of U.S. MNCs.
Keywords: repatriation tax, agency, investment, internal capital
JEL Classification: H21, H25, F23, G31
Suggested Citation: Suggested Citation