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

62 Pages Posted: 10 May 2018 Last revised: 8 Feb 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: January 25, 2019

Abstract

We develop a model to study how the change from a worldwide to territorial tax system, enacted under the Tax Cuts and Jobs Act (TCJA), affects the incentives for US multinationals to invest abroad. Although the worldwide tax system imposed a higher tax liability on foreign income, we show that it in fact encouraged excess foreign investment by depressing the opportunity cost of capital. Calibrating our dynamic model to confidential data, we find the TCJA reduces foreign investment by 9.7% for the average firm. The decline is larger for goods producers and firms with less severe agency conflicts.

Keywords: dynamic corporate finance, corporate investment, multinational corporations, taxation, agency conflicts, foreign direct investment (FDI), Tax Cuts and Jobs Act (TCJA), 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 (January 25, 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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