The Real and Financial Effects of Internal Liquidity: Evidence From the Tax Cuts and Jobs Act

57 Pages Posted: 7 Jun 2023 Last revised: 26 Apr 2024

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: April 23, 2024

Abstract

The Tax Cuts and Jobs Act unlocked as much as $1.7 trillion of U.S. multinationals' foreign cash. We examine the real and financial response to this liquidity shock and find that firms did not increase capital expenditures, employment, R&D, or M&A, regardless of financial constraints. On the financial side, firms paid out only about one-third of the new liquidity to shareholders and retained half as cash. This high retention was not associated with poor governance. The high propensity to retain the liquidity shock as cash, even among well-governed firms with limited financial constraints, is difficult to reconcile with existing theory.

Keywords: Corporate liquidity; Corporate cash holdings; Tax Cuts and Jobs Act (TCJA); Corporate investment; Mergers and acquisitions; Corporate income tax; Multinational corporations; Worldwide tax system; Repatriation tax

JEL Classification: G31, G32, G34, G35, F23, H25

Suggested Citation

Albertus, James F. and Glover, Brent and Levine, Oliver, The Real and Financial Effects of Internal Liquidity: Evidence From the Tax Cuts and Jobs Act (April 23, 2024). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=4471259 or http://dx.doi.org/10.2139/ssrn.4471259

James F. Albertus (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Brent Glover

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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