Unlocking Trapped Foreign Cash, Investor Types, and Firm Payout Policy

Abstract

I study whether trapped foreign cash levels and investor type explain variation in US-based multinationals’ payout policy responses to tax-repatriation-driven cash windfalls. To do so, I use the deemed mandatory repatriation of trapped foreign cash included in the 2017 Tax Cuts and Jobs Act (TCJA). I find my measure of the level of “unlocked” trapped foreign cash (UTC) relates to increases in repurchases and dividends observed post TCJA. I examine whether this increase in payout varies with institutional investor type: transient, dedicated, and quasi-indexers (Bushee 2001). I find that firms with high UTC and low (high) dedicated ownership see an increase (no change) in repurchases post TCJA. I do not observe similar variation with investor type for dividends. Finally, mechanism tests show that HI UTC, HI DED (LO DED) firms tend to have higher (lower) cash balances, lower (higher) payouts, and higher capital expenditures when previously capital constrained. This suggests that firms use UTC in a way that minimizes agency frictions through the presence of dedicated investors who serve as effective monitors in the setting. For this reason, HI UTC, LO DED firms have higher levels of share repurchases and lower cash balances once the UTC windfall arrives in an effort to mitigate agency frictions stemming from an inability to effectively monitor managers for the long-term.

Keywords: Cash, Tax, Corporate Payout, Payout Policy, Stock Repurchases, Dividends, Investment, Fiscal Policy, Firm Behavior, Tax Cuts and Jobs Act, Institutional Investors

JEL Classification: G35, G32, G23, M40, H32, H30, H20, F23