Investors’ Assessment of Cross-Border M&A – Repatriation Taxes, Agency Conflicts and the TCJA

Abstract

The 2017 Tax Cuts and Jobs Act (TCJA) shifted U.S. multinational corporations from a worldwide to a territorial tax system, reducing incentives to accumulate cash abroad ("trapped cash"). Prior research links trapped cash to agency conflicts in cross-border mergers and acquisitions (M&As), leading to lower announcement returns. If the TCJA reduced agency costs, M&A announcement returns should increase. However, if inefficient acquisitions continue after the TCJA, this could harm investors even more because the forgone alternative option of tax-exempt repatriation increases the relative costs of such acquisitions, leading to more negative investor reactions. Using a difference-in-differences approach, I find that cross-border M&A announcements by U.S. acquirers experience significantly lower abnormal returns post-TCJA, particularly among firms most affected by the prior repatriation tax system. Negative reactions are mitigated by stronger CEO-shareholder alignment and high payout policies, while firms with greater geographic dispersion face stronger negative reactions. Although institutional ownership does not directly impact investor reactions, I find some evidence that firms with higher institutional ownership engage in fewer acquisitions. Overall, my findings suggest that agency conflicts previously linked to the worldwide tax system persist under the territorial system, raising concerns about the effectiveness of tax reforms in mitigating inefficient corporate behavior.

Keywords: Cross-Border M&A, Agency Conflicts, Stock Market Reaction, M&A Announcement Returns, Tax Cuts and Jobs Act

JEL Classification: H25, G34, F23, M40