Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act
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.
The statistical analysis of firm-level data on U.S. multinational companies was conducted at the Bureau of Economic Analysis, U.S. Department of Commerce under arrangements that maintain legal confidentiality requirements. The views expressed are those of the authors and do not reflect official positions of the U.S. Department of Commerce. We thank Anil Kashyap for inspiration for the title, and Heitor Almeida, Alan Auerbach, Jennifer Blouin, Tom Brennan, Alex Brill, Robin Greenwood, Michelle Hanlon, Jim Hines, David Weisbach, Rohan Williamson, Jeff Wurgler, Bill Zeile, and seminar and conference participants at Harvard, MIT, the NBER, the National Tax Association, Rutgers, and the University of North Carolina Tax Symposium for helpful comments and suggestions. Foley thanks the Division of Research of the Harvard Business School for financial support. First draft: September, 2008.
The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
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, 06. citation courtesy of