Investment and Capital Constraints: Repatriations Under the American Jobs Creation Act

The American Jobs Creation Act (AJCA) significantly lowered the tax cost at which US firms could access their unrepatriated foreign earnings. We use this temporary shock to the cost of financing investment and its variation across firms, to examine the role of financial constraints in the firm’s investment decisions. Controlling for the ability to repatriate foreign earnings in a more tax efficient way under the AJCA, we find that for a majority of firms there was little change in domestic investment – the policy objective of the law. We do find, however, that for a subset of firms which are financially constrained, that a majority of the repatriated funds were invested in approved domestic investment. We find little change in financial policy (e.g. leverage and equity payouts) once we control for the ability to repatriate funds under the AJCA. These findings point out the importance of understanding finance theory when designing optimally targeted tax incentives.

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