IDEAS home Printed from https://ideas.repec.org/a/bla/jfinan/v66y2011i3p753-787.html
   My bibliography  Save this article

Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act

Author

Listed:
  • DHAMMIKA DHARMAPALA
  • C. FRITZ FOLEY
  • KRISTIN J. FORBES

Abstract

This paper analyzes the impact on firm behavior of the Homeland Investment Act of 2004, which provided a one-time tax holiday for the repatriation of foreign earnings by U.S. multinationals. The analysis controls for endogeneity and omitted variable bias by using instruments that identify the firms likely to receive the largest tax benefits from the holiday. Repatriations did not lead to an increase in domestic investment, employment or R&D -- even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained. Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders. These results suggest that the domestic operations of U.S. multinationals were not financially constrained and that these firms were reasonably well-governed. The results have important implications for understanding the impact of U.S. corporate tax policy on multinational firms.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Dhammika Dharmapala & C. Fritz Foley & Kristin J. Forbes, 2011. "Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act," Journal of Finance, American Finance Association, vol. 66(3), pages 753-787, June.
  • Handle: RePEc:bla:jfinan:v:66:y:2011:i:3:p:753-787
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bronwyn H. Hall, 1992. "Investment and Research and Development at the Firm Level: Does the Source of Financing Matter?," NBER Working Papers 4096, National Bureau of Economic Research, Inc.
    2. Gordon, Nora, 2004. "Do federal grants boost school spending? Evidence from Title I," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1771-1792, August.
    3. van de Walle, Dominique & Mu, Ren, 2007. "Fungibility and the flypaper effect of project aid: Micro-evidence for Vietnam," Journal of Development Economics, Elsevier, vol. 84(2), pages 667-685, November.
    4. Lamont, Owen, 1997. " Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 83-109, March.
    5. Altshuler, Rosanne & Grubert, Harry, 2003. "Repatriation taxes, repatriation strategies and multinational financial policy," Journal of Public Economics, Elsevier, vol. 87(1), pages 73-107, January.
    6. Lang, Larry H. P. & Stulz, ReneM. & Walkling, Ralph A., 1991. "A test of the free cash flow hypothesis*1: The case of bidder returns," Journal of Financial Economics, Elsevier, vol. 29(2), pages 315-335, October.
    7. Raj Chetty & Emmanuel Saez, 2005. "Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 791-833.
    8. Katherine Baicker & Douglas Staiger, 2005. "Fiscal Shenanigans, Targeted Federal Health Care Funds, and Patient Mortality," The Quarterly Journal of Economics, Oxford University Press, vol. 120(1), pages 345-386.
    9. Himmelberg, Charles P & Petersen, Bruce C, 1994. "R&D and Internal Finance: A Panel Study of Small Firms in High-Tech Industries," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 38-51, February.
    10. Crocker, Keith J. & Slemrod, Joel, 2005. "Corporate tax evasion with agency costs," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1593-1610, September.
    11. Alfons Weichenrieder, 1996. "Anti-tax-avoidance provisions and the size of foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(1), pages 67-81, January.
    12. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 149-182.
    13. Blanchard, Olivier Jean & Lopez-de-Silanes, Florencio & Shleifer, Andrei, 1994. "What do firms do with cash windfalls?," Journal of Financial Economics, Elsevier, vol. 36(3), pages 337-360, December.
    14. Clausing, Kimberly A., 2005. "Tax Holidays (And Other Escapes) in the American Jobs Creation Act," National Tax Journal, National Tax Association;National Tax Journal, vol. 58(3), pages 331-346, September.
    15. Fritz Foley, C. & Hartzell, Jay C. & Titman, Sheridan & Twite, Garry, 2007. "Why do firms hold so much cash? A tax-based explanation," Journal of Financial Economics, Elsevier, vol. 86(3), pages 579-607, December.
    16. Thomas W. Bates, 2005. "Asset Sales, Investment Opportunities, and the Use of Proceeds," Journal of Finance, American Finance Association, vol. 60(1), pages 105-135, February.
    17. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
    18. Shapiro, Matthew D & Slemrod, Joel, 1995. "Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding," American Economic Review, American Economic Association, vol. 85(1), pages 274-283, March.
    19. Dittmar, Amy & Mahrt-Smith, Jan, 2007. "Corporate governance and the value of cash holdings," Journal of Financial Economics, Elsevier, vol. 83(3), pages 599-634, March.
    20. Brian Knight, 2002. "Endogenous Federal Grants and Crowd-out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program," American Economic Review, American Economic Association, vol. 92(1), pages 71-92, March.
    21. Joshua D. Rauh, 2006. "Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans," Journal of Finance, American Finance Association, vol. 61(1), pages 33-71, February.
    22. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 169-215.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G3 - Financial Economics - - Corporate Finance and Governance
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jfinan:v:66:y:2011:i:3:p:753-787. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley Content Delivery) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/afaaaea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.