Examining Investor Expectations Concerning Tax Savings on the Repatriations of Foreign Earnings under the American Jobs Creation Act of 2004

Mitchell J. Oler · Terry J. Shevlin · Ryan J. Wilson

74 citations0/0 files storedJournal of the American Taxation Association

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Corporate Taxation and Avoidance Corporate Finance and Governance International Business and FDI

Abstract

The American Jobs Creation Act of 2004 was signed into law on October 22, 2004. One of the most significant aspects of this legislation is a temporary tax holiday for dividend repatriations from foreign subsidiaries. U.S. multinational corporations may elect during a one-year window to deduct 85 percent of extraordinary cash dividends received from foreign subsidiaries. In this study, we model the impact that this legislation has on a firm's decision to either repatriate or reinvest foreign earnings from abroad. We then examine investors' assessment of how U.S. multinational corporations will respond to the temporary tax holiday. Our results indicate that investors repriced the tax liability consistent with investors anticipating that U.S. multinational corporations will repatriate a significant portion of their permanently reinvested foreign earnings during the tax holiday.

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1995Earnings, Book Values, and Dividends in Equity Valuation*1991Taxes and Business Strategy: A Planning Approach 1995Price and return models 1987On cross-sectional analysis in accounting research 1985Tax policy and foreign direct investment 1998Cross-Jurisdictional Income Shifting and Earnings Valuation 2009Bringing It Home: A Study of the Incentives Surrounding the Repatriation of Foreign Earnings Under the American Jobs Creation Act of 2004 2005Why Do Firms Hold so Much Cash? A Tax-Based Explanation

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