Do Debt Constraints Influence Firms' Sensitivity to a Temporary Tax Holiday on Repatriations?

Abstract

ABSTRACT We examine whether U.S. multinationals' private and public debt constraints influence their responses to a temporary reduction in repatriation taxes (tax holiday). Using a sample of 421 U.S. multinationals with permanently reinvested earnings, we find that external debt constraints played an important role in determining their responses to the tax holiday. Specifically, we find that firms subject to fewer financial covenants in their private debt agreements or with greater access to public bond markets repatriated significantly more of their eligible funds. Our results suggest that U.S. multinationals with greater access to external debt markets have more flexibility to time their repatriations around a tax holiday and, as such, they are the primary beneficiaries of any tax savings. It is unlikely that these firms were the intended target of the American Jobs Creation Act (AJCA) 2004, given the stated legislative goals of directing repatriated funds toward financial stabilization and previously unfunded positive return investments. JEL Classifications: M4; H2; L1.