Early Evidence on the use of Foreign Cash following the Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 (TCJA) imposes a mandatory repatriation tax on multinational firms’ unremitted foreign earnings, reducing internal capital market frictions through a deemed repatriation of unremitted foreign earnings and eliminating future repatriation tax costs. This change to the U.S. corporate tax system gives multinational firms access to lower cost internal capital (i.e., foreign cash). This study provides evidence that multinational firms with greater levels of pre-TCJA foreign cash increased their post-TCJA repurchases but did not change their shareholder dividends or capital expenditures. We further document that the increase in repurchases is driven by those firms that had greater pre-TCJA repatriation tax costs and firms in weaker financial health. This outcome is consistent with internal capital market theory and suggests a decrease in internal capital market frictions allows companies access to trapped foreign cash. However, our results suggest firms used the repatriated foreign cash on shareholder payouts rather than capital investment. This conflicts with a stated goal of the TCJA to spur domestic economic growth directly and highlights an unintended consequence of the TCJA