Do bondholders incorporate expected repatriation taxes into their pricing of debt?

We examine whether repatriation tax liabilities affect bond pricing using four settings: (1) pricing on a new bond issuance, (2) pricing changes around the American Jobs Creation Act of 2004 (AJCA), (3) pricing changes around the 2016 US election, and (4) pricing changes around the Tax Cuts and Jobs Act of 2017 (TCJA). The preponderance of evidence suggests that bondholders incorporate expected repatriation taxes into bond prices. However, this evidence appears concentrated around the 2004 AJCA (which created a repatriation tax holiday) and the 2016 US election (which unexpectedly increased the likelihood of a reduction in repatriation tax rates), arguably the strongest two experiments of the four. Around the 2016 US election, we find cross-sectional evidence suggesting that the positive relation between returns and repatriation tax liabilities is strongest for firms for firms that likely faced greater borrowing distortions due to repatriation taxes and for repatriation tax liabilities specifically on foreign cash. We do not find evidence that bondholders price repatriation tax liabilities on foreign earnings that have been reinvested in operating assets, suggesting that they do not price all repatriation tax liabilities equally. Overall, our results are consistent with lenders pricing when these liabilities are causing distortions in firms’ borrowing decisions and when they are more likely to be paid.