Investors’ assessment of cross-border M&A – what drives announcement returns post-TCJA?

The 2017 Tax Cuts and Jobs Act (TCJA) shifted the US from a worldwide to a territorial tax system, reducing incentives to accumulate cash abroad (‘trapped cash’). Prior research links trapped cash to inefficient cross-border mergers and acquisitions (M&As), leading to lower announcement returns. If the TCJA mitigated excessive cross-border M&A, announcement returns should increase. However, if inefficient acquisitions continue after the TCJA, this could harm investors even more because the forgone alternative option of tax-exempt repatriation increases the relative costs of such acquisitions, leading to more negative investor reactions. Using a difference-in-differences approach, I find that cross-border M&A announcements by US acquirers experience significantly lower abnormal returns post-TCJA, particularly among firms most affected by the prior repatriation tax system. Negative reactions are mitigated by stronger CEO-shareholder alignment and high payout policies, while firms with greater geographic dispersion and weaker governance face stronger negative reactions. Although institutional ownership does not directly impact investor reactions, I find some evidence that firms with higher institutional ownership engage in fewer acquisitions. Overall, my findings suggest that inefficient acquisitions previously linked to the worldwide tax system still occur under the territorial system.