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

73 Pages Posted: 10 May 2018 Last revised: 1 Jun 2021

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 - Department of Finance

Date Written: June 1, 2021

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 Tax Cuts and Jobs Act (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 15.6% on average, with larger declines for services firms and firms with lesser agency conflicts. The reform probability, which we estimate in the model, significantly affects firms' investment and cash holdings.

Keywords: Tax Cuts and Jobs Act (TCJA), foreign direct investment (FDI), policy uncertainty, dynamic corporate finance, multinational corporations, structural estimation, corporate investment, taxation, agency conflicts, 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 (June 1, 2021). Journal of Financial Economics (JFE), Forthcoming, 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 - Department of Finance ( email )

975 University Avenue
Madison, WI 53706
United States

HOME PAGE: http://oliverlevine.com

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