Foreign Investment of US Multinationals: The Effect of Tax Policy and Agency Conflicts
60 Pages Posted: 10 May 2018
Date Written: May 2, 2018
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
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