Foreign Investment of US Multinationals: The Effect of Tax Policy and Agency Conflicts
62 Pages Posted: 10 May 2018 Last revised: 24 Dec 2019
Date Written: December 23, 2019
We estimate a dynamic model, featuring agency conflicts and a stochastic tax reform arrival, to evaluate how the change from a worldwide to territorial tax system, enacted under the TCJA, affects foreign investment. Although a worldwide system imposes a higher tax liability on foreign income, we show it encourages excess foreign investment by depressing the opportunity cost of capital. In our estimated model, the TCJA reduces foreign investment by 10.2% on average, with larger declines for goods producers and firms with lesser agency conflicts. The reform probability, which we estimate in the model, significantly affects firms' investment and cash holdings.
Keywords: dynamic corporate finance, structural estimation, corporate investment, multinational corporations, taxation, agency conflicts, Tax Cuts and Jobs Act (TCJA), foreign direct investment (FDI), corporate cash holdings
JEL Classification: G31, G32, G35, F23, H25
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