Did the Tax Cuts and Jobs Act Stimulate Capital Expenditures? A Firm-Level Approach

Abstract

We investigate whether the Tax Cuts and Jobs Act (TCJA) of 2017 motivated firms to increase capital investments. Using a unique approach that identifies firm-level tax benefits and incentives introduced by the TCJA, we find that firms that realized tax benefits increased their investment in fixed assets in the following year. Specifically, as a result of the change, an increase in forecasted earnings and an increase in nonrecurring tax benefits stimulated growth in capital investments. We also find that the investment-inducing effect of the TCJA was larger for firms with a higher cost of capital and for those with better alignment between management and shareholder interests. Although our study is not able to explain the long-term consequences of TCJA, it improves upon the previous literature showing that the mixed findings of previous studies may be the result of the unequal distribution of tax benefits among firms.

Keywords: Corporate Tax Rate, TCJA, Tax Law, Capital Investment, Corporate Governance

JEL Classification: G38, G31, H25