Investment and Capital Constraints: Repatriations Under the American Jobs Creation Act
RCB 1200 – from 2:00 – 3:30
The American Jobs Creation Act (AJCA) significantly lowered US firms’ tax cost when accessing their unrepatriated foreign earnings. Using this temporary shock to the cost of internal financing, we examine the role of capital constraints in firms’ investment decisions. Controlling for the capacity to repatriate foreign earnings under the AJCA, we find that a majority of the funds repatriated by capital constrained firms were allocated to approved domestic investment. Contrary to other examinations of the AJCA, we find little change in leverage and equity payouts. These findings demonstrate the importance of understanding finance theory when designing optimally targeted tax incentives.