Foreign Investment of US Multinationals: The Effect of Tax Policy and Agency Conflicts
62 Pages Posted: 10 May 2018 Last revised: 8 Feb 2019
Date Written: January 25, 2019
We develop a model to study how the change from a worldwide to territorial tax system, enacted under the Tax Cuts and Jobs Act (TCJA), affects the incentives for US multinationals to invest abroad. Although the worldwide tax system imposed a higher tax liability on foreign income, we show that it in fact encouraged excess foreign investment by depressing the opportunity cost of capital. Calibrating our dynamic model to confidential data, we find the TCJA reduces foreign investment by 9.7% for the average firm. The decline is larger for goods producers and firms with less severe agency conflicts.
Keywords: dynamic corporate finance, corporate investment, multinational corporations, taxation, agency conflicts, foreign direct investment (FDI), Tax Cuts and Jobs Act (TCJA), corporate cash holdings
JEL Classification: G31, G32, G35, F23, H25
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