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

60 Pages Posted: 10 May 2018  

James F. Albertus

Carnegie Mellon University - Tepper School of Business

Brent Glover

Carnegie Mellon University - David A. Tepper School of Business

Oliver Levine

University of Wisconsin - Madison

Date Written: May 2, 2018

Abstract

We study the effect of corporate tax policy on foreign investment and cash holdings using a dynamic model calibrated to confidential data on the foreign operations of US multinationals. Prior to the 2017 Tax Cut and Jobs Act, the US tax code encouraged excess foreign investment by depressing the opportunity cost of capital. The switch to a territorial system following the reform reduces the optimal level of foreign investment by 9.7% for the average US multinational, despite lowering the tax rate on foreign earnings. The decline in investment is larger for goods producers and firms with less severe agency conflicts.

Keywords: dynamic corporate finance, corporate investment, corporate cash holdings, multinational corporations, taxation, agency conflicts

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 (May 2, 2018). Available at SSRN: https://ssrn.com/abstract=3172468 or http://dx.doi.org/10.2139/ssrn.3172468

James F. Albertus

Carnegie Mellon University - 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

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