Foreign Investment of US Multinationals: The Effect of Tax Policy and Agency Conflicts

62 Pages Posted: 10 May 2018 Last revised: 24 Dec 2019

See all articles by James F. Albertus

James F. Albertus

Carnegie Mellon University - David A. Tepper School of Business

Brent Glover

Carnegie Mellon University - David A. Tepper School of Business

Oliver Levine

University of Wisconsin - Madison

Date Written: December 23, 2019

Abstract

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

Suggested Citation

Albertus, James F. and Glover, Brent and Levine, Oliver, Foreign Investment of US Multinationals: The Effect of Tax Policy and Agency Conflicts (December 23, 2019). Available at SSRN: https://ssrn.com/abstract=3172468 or http://dx.doi.org/10.2139/ssrn.3172468

James F. Albertus

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Brent Glover (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Oliver Levine

University of Wisconsin - Madison ( email )

975 University Avenue
Madison, WI 53706
United States

HOME PAGE: http://oliverlevine.com

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