Download Reinvestment Behavior of Large Repatriating Firms

Reinvestment Behavior of Large Repatriating Firms
Thomas J. Brennan∗
This Draft: March 21, 2012
Abstract
I study changes in spending for corporations that repatriated cash pursuant to
the tax holiday of the 2004 American Jobs Creation Act (AJCA). I analyze the entire
multi-year period during which reinvestment of repatriations was permitted using a
sample of public firms that includes over 50% of all repatriating firms and more than
95% of all amounts repatriated.
Like prior researchers, I find that a portion of repatriated cash was used to return
value to shareholders, but in contrast to common interpretations of much prior work,
I find that the bulk of repatriated funds was not immediately used. Instead, spending
pursuant to the AJCA took place over many years and included permissible uses,
such as acquisitions, capital expenditures and research and development. I also find
some evidence of impermissible spending on executive compensation.
These results can help inform the ongoing debate about the effects of the AJCA,
as well as whether it is desirable to have future similar holidays.
[Note to Northwestern Law Students in the Law and Economics Colloquium: This
is a work in progress and can greatly benefit from your suggestions about directions in
which the analysis can be best focused and made more detailed. I very much look forward to receiving your comments and feedback, and to getting to present this material
in person on April 4.]
Keywords: tax policy, repatriation, dividends, cash-flow, spending behavior, corporate governance
JEL Classification: F23, G30, H25, H32, K34
Associate Professor of Law, Northwestern University School of Law, 357 East Chicago Avenue, Chicago,
IL 60611, (312)503-3233 (voice), (312)503-5950 (fax), [email protected] (email). I am
grateful to Andrew Lo for his generous advice and support throughout my postdoctoral work at the MIT
Laboratory for Financial Engineering at the MIT Sloan School of Management, where I wrote a prior version of this paper. I am also grateful to Antoinette Schoar for her generous advice and support, particularly
in connection with the research and work underlying this paper. I also thank Nittai Bergman, Bernie
Black, Cathryn Brennan, David Cameron, Charlotte Crane, Dhammika Dharmapala, Mike Epstein, Jasmina Hasanhodzic, Dirk Jenter, Kathryn Kaminski, Michael Knoll, Ruth Mason, Bob McDonald, Jun Pan,
Mitchell Petersen, Philip Postlewaite, Nancy Staudt, Jialan Wang, Jiang Wang and workshop participants
at MIT Sloan, the MIT Laboratory for Financial Engineering, Drexel University Earle Mack School of Law,
and Northwestern University Law School and the 2008 Junior Tax Scholars Workshop for helpful comments,
advice and encouragement.
∗
1
Introduction
The American Jobs Creation Act of 2004 (AJCA) established a limited-time substantial
tax reduction for cash dividends that served to repatriate earnings from foreign subsidiary
corporations to their U.S. parents, and the response by firms was significant, with an aggregate of more than $300 billion returned from overseas. This was generally beneficial for
taxpayers, but there were some strings attached, inasmuch as the uses for repatriated funds
were restricted to projects deemed to foster domestic business and ultimate job creation.
In this paper, I analyze empirically the spending changes for repatriating firms in the years
after 2004. I thereby exploit the unique opportunity presented by the AJCA for gaining
insight into how corporate managers choose to deploy large amounts of newly domestically
available, and I also obtain information about the effectiveness of the legislatively imposed
spending restrictions of the AJCA. The study of these issues is of particular interest in light
of the current debate about whether have future holidays similar to that of the AJCA.1
A central finding of previous research has been that repatriated funds were used to return
value to shareholders, either through the repurchase of stock or the payment of dividends,
and this has been of interest because such payouts to shareholders were not allowed under
the restrictions of the AJCA. I also find evidence of this type of usage of cash, but in contrast
to common interpretations of prior research, I find that such payments cannot explain the
bulk of the use of repatriated funds, at least not during the first year after the repatriation.
To see this, I note, for example, that the 29 firms repatriating more than $2 billion each
brought back an aggregate of $201.7 billion. The sum across all these firms of the amounts
by which repatriations exceeded payouts to shareholders (including both share repurchases
1
and dividends) in 2005 is $103.3. Thus, with respect to these largest 29 repatriators, at
least 51% of the amounts repatriated cannot have been spent on shareholder payouts during
2005.2 To my knowledge, I am the first to make this point, and it stands in contrast to a
common interpretation of the results of Dharmapala et al. (2011), namely that as much as
$0.92 of every dollar repatriated was spent on shareholder payouts during 2005.3
Because much of the repatriated money was not returned immediately to shareholders, it
follows either that significant spending in the short-term must have taken place with respect
to other items, perhaps ones permissible under the AJCA, or that significant spending of
repatriated funds occurred at a time after 2005. To determine exactly what types of spending
occurred and when, the study in this paper covers a range of up to 5 years after the window
for the AJCA tax holiday closed. It is important to analyze such a substantial period of
time because IRS reports indicate that up to 6% of firms planned reinvestments that would
not be complete until after the end of 2009.4
I begin by collecting data from public annual securities filings about the amounts of permanently reinvested foreign earnings (PRE) held by corporations and amounts repatriated
pursuant to the AJCA holiday. I identify 436 repatriating firms. This figure is only a little
more than half of the total number of repatriating firms reported by the IRS, because many
repatriating firms are non-public or did not view their repatriation decisions as material
facts necessary to disclose in their securities filings. Nevertheless, the set of firms I identify
accounts for about 95% of all repatriated dollars, and it therefore represents an important
group to study for purposes of understanding the overall impact of the repatriation holiday. In addition to these repatriating firms, I identify another 1,129 firms that likely had
PRE but did not choose to repatriate. For my analysis I limit the sets of repatriating and
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non-repatriating firms I consider to those for which there is publicly available cash flow and
spending data for a significant window of years around the AJCA tax holiday, and I further
limit the sample to include only non-financial firms. This results in a set of 350 repatriating
firms and 456 firms with PRE that did not choose to repatriate.
The statistical technique I use is a difference-in-difference analysis that detects the difference, if any, that occurs after the change in law to the difference between the cash-flow
pattern of repatriating firms and the corresponding cash-flow pattern of non-repatriating
firms. The period I analyze runs from 1999, five years before the enactment of the AJCA,
through 2011, five years after the close of the tax holiday window. Thus, my statistical tests
determine how the difference between cash flows for repatriating firms and non-repatriating
firms changed in the time period from enactment of the AJCA through 2011, relative to a
benchmark level determined by the five years immediately prior. In addition to considering
the post-enactment period in the aggregate, I also augment my statistical tests with variables
that identify separately each post-enactment year, and I report these results as well as the
aggregate ones. The full period for reinvestment is something that has not previously been
analyzed in the literature, and as such it represents a further way in which the findings of
this study provide a more complete understanding of repatriation reinvestment than that
possible in prior work.
My difference-in-difference approach leaves open the possibility that changes detected in
the cash flows may be a result of some factor other than the repatriated dollars themselves.
In addition, there is a possibility that repatriating firms may have chosen to repatriate
because they were simply the firms that had investment opportunities available. I attempt
to mitigate the omitted variable problem by adding various controls to my statistical tests,
3
including operating cash flows and book-to-market ratio, as well as fixed effects for firms
and years. Perhaps more importantly, however, both the omitted variable possibility and
the possibility of endogeneity are less concerning when the primary goal is determination
of how the bulk of the repatriated money was spent, rather than how a typical moderatesized repatriating firm behaved. The largest firms repatriated enormous amounts relative
to typical annual spending in the various categories I consider. Thus, as long as a detected
change is a substantial fraction of the amount repatriated, it is relatively unlikely that the
change is driven by factors other than the availability of repatriated funds. Similarly, if no
change is detected then it is relatively unlikely that a significant portion of repatriated funds
were spent on a particular cash flow. To focus on the case in which repatriations are largest,
I perform statistical tests first for the entire sample of firms and then again for only the
largest repatriating firms, which I define to be those that repatriated more than $2 billion.
For these firms concerns about erroneous results should truly be minimal.
My central findings with respect to my entire data set are that equity repurchases and
dividend payments did occur, and in fact they were spread over a period of years. Spending
on research and development and capital investments also took place over a number of years,
and these were generally permissible uses of funds under the AJCA’s rules. Finally, there
is evidence that spending on current executive compensation increased, and this was an
impermissible use of repatriated funds. With respect to just the largest repatriating firms
(less than 5% of all repatriating firms that accounted for about two-thirds of all amounts
repatriated), share repurchases were not as substantial and there was no significant change
in capital investment. There was significant spending on acquisitions and research and
development, however, and there was again a significant increase in executive compensation.
4
The remainder of this paper is divided into several parts. In Section 2, I review related
prior literature pertaining to the repatriation holiday and the ways in which firms respond to
cash-flow shocks in general. In Section 3, I describe the law related to the taxation of foreign
earnings and the details of the rules regarding repatriations. In Section 4, I describe the
data I use for my analysis. In Section 5, I describe the statistical methodology I employ and
report the results of my findings. In Section 6, I add governance measures to my analyses
and report the findings. Finally, Section 7 concludes.
2
Related Literature
My findings contrast significantly from those of several previous studies of reinvestment
following repatriation. For example, Baghai (2010), Blouin and Krull (2009), Clemons and
Kinney (2008), and Dharmapala et al. (2011) all find substantial evidence that firms returned
value to equity shareholders through stock repurchases, and none of them find meaningful
increases in debt issuances or on spending on acquisitions or research and development.
These results may be reconciled with mine inasmuch as the previous studies generally did
not focus on large repatriating firms, which accounted for most repatriated dollars and
may have exhibited a fundamentally different spending pattern from the typical firm in the
much broader samples studied by others. Such a difference is plausible for various reasons,
including the fact that spending by the largest repatriating firms was likely the most visible
to the public and also subject to the highest potential for IRS scrutiny in subsequent audits.
In addition, previous studies were conducted before the full period of reinvestment was
complete, and so their results do not reflect all relevant spending decisions. My analysis is
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the first to account for the entire period of dividend reinvestment, and many of my results
indicate that significant spending occurred in years after funds were repatriated.
There have been several other studies related to the repatriation tax holiday. Graham
et al. (2010) conduct a detailed survey of tax executives and document the sources of repatriated cash and spending decisions by firms. They find that most spending decisions were in
line with the requirements of the AJCA, although they also find that cash that was “freed up”
by the availability of repatriated funds was used to return value to shareholders. Petersen
and Faulkender (2009) conduct a careful and enlightening analysis showing that financially
constrained firms tended to invest more funds in domestic investments approved under the
AJCA. My findings are compatible with those of both of these studies and demonstrate that
the tendency to invest in permissible ways by the types of firms they identified was also
shared by my population of the largest repatriating firms. An additional related work is
Brennan (2008), an unpublished earlier version of this paper in which I examine a much
shorter time period after enactment of the AJCA and focus on quarterly rather than annual
data. The findings based on that more limited analysis are broadly consistent with those in
this paper.
A final paper related to the AJCA holiday that bears particular note is Redmiles (2008).
Her work is based on the tax filings of firms with the IRS, and as such it provides the
best information about the details of the exact size and nature of repatriations because it is
based on IRS data. Unfortunately the data are private taxpayer information and may not
be shared with the public. As a result, it is not possible to use the IRS data for further
analyses of the types I or other researchers outside the IRS have performed.
A number of prior researchers have used cash shocks to study theories of capital markets
6
and have found significant evidence that capital markets are imperfect and that managerial
agency problems exist. For example, Blanchard et al. (1994) studied large litigation awards
received by corporations. They found that capital expenditures increased after the awards,
and they found their evidence to be more supportive of theories of agency problems than
of theories of costly external financing. Lamont (1997) studied internal capital markets of
oil companies at the time of a sharp fall in oil prices. He found that investment in non-oil
divisions fell when oil prices dropped, and this was inconsistent with theories of perfect capital
markets, which would predict no such change in investment. Harford and Haushalter (2003)
studied the impact of an increase in oil prices on oil companies. They found that financially
constrained companies invested less than their unconstrained peers prior to the cash windfall,
and they concluded, inconsistent with theories of perfect capital markets, that financial
constraints affect firms’ investment decisions. Rauh (2006) studied how corporate investment
depends on internal financing constraints arising from exogenous changes in pension funding
requirements. He used large-sample estimation to find that capital expenditures decline with
increases in required pension contributions, a result inconsistent with theories of perfect
capital markets.
In this paper, I use large-sample estimation techniques to analyze firm responses to an
exogenous change to internal financial resources. In contrast to prior studies, however, I
study the response to the removal of a tax barrier to the internal flow of funds in a firm. I
am thus able to test how management reacts to the ability to distribute capital more freely
across different divisions of the firm. In further contrast to prior studies, the repatriated cash
I study is subject to legal spending restrictions. As noted in Section 1, these restrictions
may really have only constituted “loose strings attached,” but they may still have provided
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management with a type of cover for spending choices that is not typically available in when
a cash shock occurs. Despite these differences, the question of managerial agency problems is
still of central importance in determining how the increased ability to allocate capital within
a firm is used, and my work thus complements the prior literature by providing evidence of
likely managerial agency problems in this new context.
3
Background and Mechanics of Repatriations
The AJCA was passed by Congress on October 11, 2004 and signed into law by President
George W. Bush on October 22, 2004. The act contained many provisions, but for purposes
of the current study, I focus only on the portion that required the creation of §965 of the U.S.
Internal Revenue Code. This new code section allowed for a reduction in tax liability arising
from certain cash amounts repatriated by U.S. corporations from their foreign subsidiaries,
but only during a limited period of time.
For federal income tax purposes, a U.S. corporation with a foreign subsidiary is generally
liable for U.S. corporate taxes on the earnings and profits of that subsidiary when such
amounts are repatriated to the U.S. parent. When this tax is paid, it is offset by any foreign
tax credits arising from foreign taxes paid on the same income, with the net result that the
corporation effectively pays the higher of the foreign and U.S. tax rates. If the subsidiary
keeps its earnings reinvested abroad, however, it is not necessary for any U.S. tax to be paid,
subject to certain exceptions not relevant for the current analysis. Thus, if a corporation
has earnings in a foreign jurisdiction with a low tax rate, it can avoid having to pay the
higher U.S. tax by keeping its earnings reinvested overseas. In 2004, many corporations were
8
known to keep funds invested abroad in this way, and one of the principal goals of §965 was
to encourage firms to repatriate such earnings and reinvest in them in the U.S.5
For accounting purposes, U.S. corporations are generally required to set aside reserves
for taxes that will be payable, including U.S. taxes that will ultimately need to be paid on
foreign earnings at such time as they are repatriated. However, an exception is made by
Accounting Principles Board Opinion 23 (APB 23) for earnings deemed to be permanently
reinvested overseas, since such earnings are expected not to be subject to U.S. taxation
indefinitely. Thus, if earnings in a foreign subsidiary are permanently reinvested overseas, a
firm can both avoid current payment of U.S. tax due and also not reflect any deferred tax
liability on its financial statements.
The mechanism employed by §965 was an 85% tax deduction for qualifying cash dividends from an overseas subsidiary to its parent corporation. Thus, if the otherwise applicable
marginal federal corporate tax rate was 35%, the effective tax rate on the qualifying repatriations would be no more than 35% (1 − 0.85) = 5.25%. If foreign tax credits were available
for foreign taxes paid in connection with the repatriated earnings, then the U.S. tax payable
was subject to further reduction, and so the effective tax rate may have been less than 5.25%.
On the other hand, the special treatment of §965 was not applicable to the extent that the
dividend did not exceed a certain historic base amount defined in §965(b). As a result, the
aggregate U.S. tax payable on both the qualifying and the non-qualifying portion of a dividend might exceed 5.25% of the total combined amount of the dividend. Nevertheless, the
reduction provided by §965 was substantial, and many firms chose to repatriate. Redmiles
(2008), for example, reports that 843 corporations repatriated almost $362 billion, of which
$312 qualified for the §965 deduction.
9
The repatriation tax holiday was both limited in time and limited as to the uses to which
the repatriated funds could be put. With respect to time, corporations were allowed to
repatriate funds until the end of the fiscal year that began after the enactment of the AJCA
into law. Because this enactment occurred in October 2004, repatriations pursuant to §965
could generally occur no later than September 2006. The precise length of the favorable
repatriation window varied by firm, and it could last as little as one year or as much as two
years, depending upon the firm’s fiscal year end.
With respect to uses for the repatriated cash, §965(b)(4) required repatriated funds to
be reinvested in the U.S. pursuant to a “domestic reinvestment plan” approved by senior
management, as well as the board of directors. Permitted uses under such a plan include
worker hiring and training, infrastructure, research and development, capital investment,
and financial stabilization of the corporation for purposes of job retention and creation.
The nature of permitted uses was further clarified by IRS Notice 2005-10, which detailed
several specific permitted uses of repatriated cash, including the repayment of debt and
the acquisition of other firms. An acquisition would only qualify to the extent the assets
of the target firm, if acquired directly, would themselves be permissible investments for
the repatriated funds. All permitted expenditures were required to be made in cash, and
acquisitions would be disqualified to the extent they were accomplished in payment with
stock. The guidance of Notice 2005-10 also specified certain uses that were not permitted,
including the payment of dividends, the repurchase of stock, and the payment of executive
compensation.
Despite its provision of detailed guidance regarding permitted uses of repatriated funds,
Notice 2005-10 also made it clear that no tracing or segregating of repatriated funds was
10
required. Thus, it was possible for repatriated funds to be used directly for non-permitted
purposes, as long as an equivalent amount of cash would eventually be spent on permitted
projects. Moreover, firms were not required to show that ultimate permitted projects were
not simply investments that would not otherwise have been planned notwithstanding the
enactment of §965. As a result, it is not necessarily the case that §965 would cause firms to
deviate in a meaningful way from their previously planned pattern of expenses. Nevertheless,
repatriating firms were required to file the details of their domestic reinvestment plan with
the IRS, and they are subject to review and audit by the IRS to ensure that appropriate
domestic investment of cash was actually made as required under §965.
Although firms needed to determine their domestic reinvestment plans at about the same
time as the repatriating dividends were made, the investments pursuant to these plans were
allowed to take place over a period of several years. Redmiles (2008) reports that about 70%
of repatriating firms indicated that reinvestment would generally be completed by the end
of 2007, more than three years after the start of the repatriation tax holiday. The remaining
30% did not expect to complete their reinvestment plans until a later point, and 6% reported
a completion date later than the end of 2009.
4
Description of the Data
I collected information from public securities filings in order to construct a data set that
allows for empirical analysis of the behavior of firms with permanently reinvested earnings
(PRE), including both those that repatriated funds under the AJCA and those that did
not. Even though APB 23 does not require a reserve for U.S. income taxes on PRE, firms
11
nevertheless often report the amount of such PRE in the footnotes of their financial filings,
provided that the amount is large enough to be deemed material. In addition, if a repatriation
decision pursuant to §965 was deemed material as well, then it would also have been reported
in the financial statements. As a result, annual 10-K filings provide a significant amount of
information both about the amount of PRE held by firms and repatriation decisions.
To identify the relevant securities filings, I searched the Edgar Pro database for filings
during the period from June 1, 2004 through May 31, 2005. I constructed queries designed
to identify firms that discussed PRE in their annual reports during this time period.6 I then
downloaded securities filings from the SEC’s Edgar database and reviewed all annual filings
for discussion of PRE and repatriation. After removing duplicates, I identified 436 firms in
my sample that had repatriated, and another 1,129 firms that likely had PRE but did not
choose to repatriate. I then limited the sample further to just those firms that had at least
4 years worth of publicly available securities filings for the period both before and after the
AJCA holiday, and I also excluded financial firms (identified with a GICS sector code of 40)
from my sample. This ultimately resulted in a set of 350 repatriating firms, 335 of which
reported the actual amount repatriated, and 456 non-repatriating firms. Table 1 summarizes
the various populations of firms I use in my analysis and reports the size of each.
[Table 1 about here.]
Table 2 tabulates the fraction of firms in each GICS code sector for each of the groups PR ,
PB , and PN . The firms in PR and PN have a largely similar distribution across sectors, with
the most substantial difference being a relatively higher weighting of PN in the information
technology sector. The firms in PB exhibit more differences relative to the other two groups,
12
with the most substantial being a much higher weighting in the health care sector, which
includes pharmaceutical manufacturers.
[Table 2 about here.]
In Section 5, I perform statistical analyses designed to contrast the changes in cash flow
for firms in PR with those in PN and PZ . In addition to this comparison, I also carry out
analyses in which PR is replaced by PB , the 26 firms in PR reporting a “big” repatriation
dividend, which I define to be an amount more than $2 billion in size. By performing analyses
contrasting PB with PN and PR , I check that cash flow patterns I identify for firms in PR
are also present in the firms making the biggest repatriations.
Table 3 reports summary statistics for the repatriation dividend sizes by firms in PR and
PB . The amount of the repatriation for each firm is the value that was reported in their public
financial filings. These figures often do not identify what portion of the dividend from the
subsidiary to the parent qualified under §965, and so the numbers may sometimes represent
an aggregate of both qualified and unqualified dividends. To a large extent, however, the
stated amounts should be good estimates for the qualified portions.
[Table 3 about here.]
In addition to representing a large portion of all funds repatriated under §965, my sample
of firms also represents a large portion of the market value of all public corporations. Table
4 reports market value information for the firms in my sample at the end of the 2004 fiscal
year. For comparison, the market value on October 21, 2004 for all firms in the CRSP
database totaled $15.2 trillion. Thus, the total market value of $6.6 trillion for the firms in
my sample accounts for roughly half of the market value of all public firms.
13
[Table 4 about here.]
For each firm in my sample, I collected information on several cash-flow and expense items
for all fiscal years ending between October 1999 and May 2011. I use these data to study the
way in which repatriation of funds pursuant to §965 affected each item. Most of the data
come from the Compustat database listing the values from cash flow statements of annual
securities filings. Two items, pension expenses and research and development expenses,
were not available as cash flow items, and so I use income statement values instead, also as
reported by Compustat. Finally, the executive compensation item is the aggregate amount
of annual cash and non-cash compensation for all exectuvies reported in the ExecuComp
database. This time range provides five years of data for all firms prior to the first fiscal
year in which repatriations under §965 were permitted. It also includes the entire window
during which qualifying repatriations were allowed, as well as five years thereafter. It is
important to consider this subsequent period of time as well as the repatriation window
because firms were permitted several years for implementation of their dividend reinvestment
plans for repatriated funds. There was no specific limit on the permissible amount of time
for reinvestment, but, as reported by Redmiles (2008), reinvestment periods spanned a long
period of time, with at least 6% of firms planning reinvestments after the end of 2009.
Table 5 provides summary statistics for the several cash-flow and expense items for the
non-repatriating firms in my sample. The items appear in three groups. The first deals with
equity-related cash flows and includes the purchase of common stock and the sale of common
stock, as well as the net of these two quantities, and also dividend payments. The second
deals with debt-related cash flows and similarly includes the use of cash for repurchase of
14
long-term debt and the receipt of cash through the issuance of long-term debt, as well as
the net of these two quantities and also the change in the amount of short-term debt. The
third category deals with non-financing related investment and spending and includes cash
spent on acquisitions, cash generated by the sale of PPE, pension expenses, research and
development expenses, and aggregate executive compensation amounts. All the statistics
reported are scaled by lagged assets, defined as the total book assets reported at the close
of the preceding fiscal year.
[Table 5 about here.]
The sizes of the repatriated amounts by firms in PR are generally substantial compared
to each cash-flow and expense item that I analyze. Table 6 reports summary statistics of the
same sort as Table 5 for only the firms in PR . It also reports the interquartile range for each
cash-flow and expense item divided by the repatriation amount for the relevant firm. The
upper end of this range is generally below 1, except in four cases in which it falls between
1 and 2. I report the interquartile range, rather than the mean and standard deviation,
because the few firms in PR with only small repatriation amounts skew these latter statistics
significantly upward.
[Table 6 about here.]
5
Reinvestment of Repatriated Amounts
To study the impact of repatriation on corporate cash flows, and hence the reinvestment
behavior of repatriating firms, I use a difference-in-difference analysis for each of the cash15
flow and expense variables summarized in Table 5. I calculate robust t-statistics using a
White-type covariance matrix, as recommended in Bertrand et al. (2004) to correct for the
possibility of serial correlation.
The basic regression is carried out on a panel of firm-years and is of the form
Xi,t
= Fi + Pt + βCOp
Ai,t−1
COp,i,t
Ai,t−1
+ βQ Qi,t + βδR,i,t + γ
Ri
Ai,2004
δR,i,t + εi,t .
(1)
The indices i and t run through all firms in PN R and all fiscal years ending between October
1999 and May 2011, inclusive, respectively. The independent variable is the ratio of the
particular cash-flow or expense item being analyzed to lagged book assets, defined as the
book asset value at the start of the relevant fiscal year. The regression controls for firm and
year fixed effects, denoted by Fi and Pt , and it includes controls for operating cash-flow,
written COp,i,t, scaled by lagged assets, and Tobin’s Q, written Qi,t ,7 since both of these
factors may explain a significant amount of variation in the dependent variable. The terms
of primary interest involve the dummy variable δR,i,t , which is either zero or one, and equals
one just when fiscal year t ends after the AJCA was signed into law and firm i is in PR . This
dummy variable is included as a term in the regression with coefficient β. In addition, the
product of this dummy variable with the repatriated amount, Ri , divided by the asset level
at the time of passage of the AJCA, Ai,2004 , is also included in the regression with coefficient
γ. The value of β thus identifies the average incremental change in the left-hand variable
across all firms in PR , measured relative to firms in PN , while the value of γ represents the
change in proportion to the size of the repatriation. Finally, the residual for the regression
is written εi,t.
16
I perform a second set of related regressions to obtain a better understanding of when
repatriated funds were spent over the course of the several years following passage of the
AJCA. The form of these additional regressions is
Xi,t
= Fi + Pt + βCOp
Ai,t−1
7
7
X
X
Ri
COp,i,t
+ βQ Qi,t +
βj δR,j,i,t +
γj
δR,j,i,t + εi,t . (2)
Ai,t−1
Ai,2004
j=1
j=1
The variables are the same as in (1), except that the single terms δR,i,t and
Ri
Ai,t−1
δR,i,t
are replaced by terms instead involving the factors δR,j,i,t , for j = 1, . . . , 7. Each δR,j,i,t is
a dummy variable that is 1 for repatriating firms i during the t-th fiscal year ending on or
after the enactment of the AJCA into law. Thus, the coefficient βj identifies the average
spending change occurring in the j-th year during which foreign accumulated earnings were
first permitted to be repatriated, and the coefficient γj identifies the change in proportion
to the size of the repatriation. By comparison, the coefficients β and γ from (1) represents
a rough average of the several β7 values.
Results of the regressions in (1) and (2) for equity-related cash flows are reported in
Tables 7, 8, and 9. These results show that equity repurchases and dividend payments
did occur, and in fact they were spread over a period of years. Spending on research and
development and capital investments also took place over a number of years, and these were
generally permissible uses of funds under the AJCA’s rules. Finally, there is evidence that
spending on current executive compensation increased.
[Table 7 about here.]
[Table 8 about here.]
17
[Table 9 about here.]
To gain further insight into which firms are most important for the results, I also perform
the regressions in (1) and (2) omitting all firms that repatriated an amount of funds that
was less than $2 billion. In this circumstance the coefficients β and γ have the same meaning
as above, except that the reflect only the spending patterns of the largest repatriating firms.
With respect to these firms, share repurchases were not as substantial and there was no
significant change in capital investment. There was significant spending on acquisitions and
research and development, however, and there was again a significant increase in executive
compensation. Detailed results are presented in Tables 10 and 11.
[Table 10 about here.]
[Table 11 about here.]
6
The Effect of Governance
A corporation’s governance style may affect its uses of repatriated dividends, and to study
the possibility of such connections, I add terms with measures of corporate governance to
the regressions carried out in Section 5. I use two alternate measures of governance: the
governance index, G, defined by Gompers et al. (2003) and the entrenchment index, E,
defined by Bebchuk et al. (2009). The possible values of the G index range from 1 to 24,
with higher values corresponding to weaker shareholder rights, and the corresponding range
for the E index is 0 to 5, with higher values corresponding to greater entrenchment by
management. Thus higher values for either index generally represent stronger management
18
control. Summary statistics for these indices for firms in each of the populations I study are
reported in Table 12.
[Table 12 about here.]
The modified version of (1) incorporating the G index is
Xi,t
= Fi + Pt + βCOp
Ai,t−1
COp,i,t
Ai,t−1
+ βQ Qi,t + βδR,i,t + γ
+ βG0 Gi,t + βG δR,i,t Gi,t + γG
Ri
Ai,2004
Ri
Ai,2004
δR,i,t +
(3)
(4)
δR,i,t Gi,t + εi,t .
The modified version of (2) is similar and is written
Xi,t
= Fi + Pt + βCOp
Ai,t−1
+ βG0 Gi,t +
COp,i,t
Ai,t−1
7
X
+ βQ Qi,t +
βj δR,j,i,t +
7
X
j=1
γG,j
7
X
j=1
j=1
βG,j δR,j,i,t Gi,t +
j=1
7
X
Ri
Ai,2004
γj
Ri
Ai,2004
δR,j,i,t
δR,j,i,t Gi,t + εi,t.
The difference between this and (3) is that the terms involving δR,i,t are replaced by the
seven terms involving δR,j,i,t , which identify individually each of the seven fiscal years ending
after the enactment of the AJCA into law, up to the end of the sample period in 2011. The
corresponding equations involving the E index simply replace G with E in (3) and (4).
Results of the regressions in (3) and (4) are reported in Table 13 for items related to
share repurchases.
[Table 13 about here.]
The results for the regressions in (3) and (4) that replace G with E are largely similar,
and I do not report the full details here.
19
[Further discussion of governance results to come here.]
7
Conclusion
The AJCA created §965 of the U.S. Internal Revenue Code, which provided for a limited-time
tax holiday for U.S.-based multinational corporations repatriating earnings from foreign subsidiaries by way of a cash dividend to U.S. parents. It also provided for spending restrictions
on funds returned to the U.S. I study the changes in spending for a sample of repatriating
firms on the S&P500 to determine how spending actually changed, as reported in firms’
public securities filings, over the course of the several years during which reinvestment of
repatriated amounts occurred.
My results are compatible with prior research indicating that some repatriated funds were
used to return value to shareholders, something not permitted under the rules of the AJCA
holiday. However, my results also demonstrate that this return of value to shareholders was
not as large a fraction of all repatriated cash as has often been represented in the press. I
also find that spending occurred over a number of years, and that much of it was used on
permissible purposes, including capital expenditures and research and development. There
is also evidence of spending on executive compensation, which was an impermissible use of
funds under the AJCA.
I also study the largest repatriating firms separately from the entire pool of firms. This
is important because about 5% of firms brought back nearly two-thirds of all funds, and
so an understanding of the largest repatriators is crucial to determining how the bulk of
repatriated dollars were spent. I find that the largest repatriating firms did exhibited different
20
behavior from other firms, including a relatively smaller return of value to shareholders and a
significant increase and also including significant expenditures on acquisitions, a permissible
use of funds under the AJCA.
My results provide valuable new evidence about how the bulk of repatriated funds were
spent, and this helps inform the tax policy debate of whether future similar tax holidays
are desirable. It is encouraging to find that spending seems to have complied with the
requirements of the AJCA to a greater extent than is commonly believed, although it remains
the case that significant impermissible spending still occurred. Both these factors should be
weighed carefully when considering and designing possible future holidays.
21
References
Baghai, R. P., 2010, “Corporate Governance and Extraordinary Earnings Repatriations:
Evidence from the American Jobs Creation Act,” American Finance Association 2010
Atlanta Meetings Paper , available at SSRN: http:ssrn.com/abstract=1311429.
Bebchuk, L. A., Cohen, A., and Ferrel, A., 2009, “What Matters in Corporate Governance?”
Review of Financial Studies, 22(2), 783–827.
Bertrand, M., Duflo, E., and Mullainathan, S., 2004, “How Much Should We Trust
Differences-In-Differences Estimates?” Quarterly Journal of Economics, 119(1), 249–275.
Blanchard, O. J., de Silanes, F. L., and Shleifer, A., 1994, “What Do Firms Do with Cash
Windfalls?” Journal of Financial Economics, 36(3), 337–360.
Blouin, J. L. and Krull, L. K., 2009, “Bringing It Home: A Study of the Incentives Surrounding the Repatriation of Foreign Earnings under the American Jobs Creation Act of
2004,” Journal of Accounting Research, 47(4), 1027–1059.
Brennan, T. J., 2008, “Cash-Flow and Market Response to Repatriation,” 3rd
Annual
Conference on
Empirical
Legal
Studies
Papers,
available
at
SSRN:
http://ssrn.com/abstract=1134040.
Brennan, T. J., 2010, “What Happens After a Holiday?: Long-Term Effects of the Repatriation Provision of the AJCA,” Northwestern Journal of Law and Social Policy, 5, 1–18.
Clemons, R. and Kinney, M. R., 2008, “An Analysis of the Tax Holiday for Repatriation
Under the Jobs Act,” Tax Notes, pp. 759–768.
22
Clemons, R. and Kinney, M. R., 2010, “An Analysis of the Tax Holiday for Repatriation
Under the Jobs Act,” National Tax Association Proceedings, pp. 22–36.
Dharmapala, D., Foley, C. F., and Forbes, K. J., 2011, “Watch What I Do, Not What I Say:
The Unintended Consequences of the Homeland Investment Act,” Journal of Finance,
66(3), 753–787.
Gompers, P., Ishii, J., and Metrick, A., 2003, “Corporate Governance and Equity Prices,”
Quarterly Journal of Economics, 118(1), 107–166.
Graham, J., Hanlon, M., and Shevlin, T., 2010, “Barriers to Mobility: The Lockout Effect of
U.S. Taxation of Worldwide Corporate Profits,” National Tax Journal , 63(4), 1111–1144.
Graham, J. R., Raedy, J. S., and Shackelford, D. A., 2011, “Research in Accounting for Income Taxes,” Working Paper , available at SSRN: http://ssrn.com/abstract=1312005.
Harford, J. and Haushalter, D., 2003, “Cash-Flow Shocks, Investments and Financial Constraint: Evidence from a Natural Experiment,” Working Paper .
Kleinbard, E. D. and Driessen, P., 2008, “A Revenue Estimate Case Study: The Repatriation
Holiday Revisited,” Tax Notes, p. 1191.
Lamont, O., 1997, “Cash Flow and Investment: Evidence from Internal Capital Markets,”
Journal of Finance, 52(1), 83–109.
Petersen, M. A. and Faulkender, M. W., 2009, “Investment and Capital Constraints: Repatriations Under the American Jobs Creation Act,” NBER Working Paper Series # 15248 ,
available at SSRN: http://ssrn.com/abstract=1454981.
23
Rauh, J., 2006, “Investment and Financing Constraints: Evidence from the Funding of
Corporate Pension Plans,” Journal of Finance, 61(1), 33–71.
Redmiles, M., 2008, “The One-Time Dividends Received Deduction,” IRS Statistics of Income Bulletin, 27(4), 102–114.
24
Notes
1
Legislation for future such holidays has be introduced in both the House and the Senate. On May 11,
2011, Congressman Brady introduced the Freedom to Invest Act of 2011, HR 1834, and on October 6, 2011,
Senators Hagan and McCain introduced the Foreign Earnings Reinvestment Act, S 1671.
2
As a futher specific example, Schering Plough repatriated $15.9 billion, but its aggregate spending on
shareholder payouts (including both share repurchases and dividends) was only $2.2 billion for the entire
time period from 2004 through 2008.
3
See, for example, the June 5, 2009 article in the New York Times, “How Tax Break for Overseas Profits
Went Awry,” which states, “[a]bout 92 percent of it went to shareholders, mostly in the form of increased
share buybacks and the rest through increased dividends.” See also the October 11, 2011 Senate Majority
Staff Report to the Permanent Subcommittee on Investigations, “Repatriating Offshore Funds: 2004 Tax
Windfall for Select Multinationals,” which cites the $0.92 figure from Dharmapala et al. (2011).
4
See Redmiles (2008).
5
Clemons and Kinney (2010) documents several quotes by U.S. Representatives explaining the rationale
for the new law.
6
The queries I used were “earnings ¡near/20¿ unremit*,” “reinvest* ¡near/20¿ indefinite*,” and “reinvest*
¡near/20¿ permanent*,” and these produced 594, 782 and 724 hits, respectively.
7
I calculate Tobin’s Q as the ratio of market assets to book assets at the start of the relevant fiscal year.
The value for market assets used is the sum of the market value of equity and the excess of the book value
of assets over the sum of the book values of equity and deferred taxes.
25
Tables
Description
Non-Financial Firms
Repatriators with amount reported
Repatriators with no amount reported
Non-Repatriators
Financial Firms
Repatriators with amount reported
Repatriators with no amount reported
Non-Repatriators
Entire Sample
Label
N
Percent
PR
335
15
456
39.5
1.8
53.7
21
4
18
849
2.5
0.5
2.1
100.0
PN
Table 1: The six categories of firms listed are mutually exclusive subsets of the entire sample
of 849 firms. The subsets labeled PR and PN will be used in the analysis that follows. The
acronym “PRE” refers to “permanently reinvested earnings” that a firm has in an overseas
subsidiary.
Sector
Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Telecommunication Services
Utilities
Total
GICS Code
10
15
20
25
30
35
40
45
50
55
% in Each Group
PR
PB
PN
4.3
0.0
7.0
11.7
7.7
8.6
21.1
3.8 21.3
15.4
7.7 14.7
9.7 15.4
4.6
11.7 34.6
6.8
0.0
0.0
0.0
22.0 26.9 35.3
0.3
3.8
0.4
3.7
0.0
0.4
100.0 100.0 100.0
Table 2: The firms in the groups PR , PB , and PN fall into one of 10 GICS-code sectors.
The first column describes the sectors, the second column indicates the corresponding GICS
codes, and the remaining columns report the percentage of firms from each group in each
sector. Note that there are no firms in the financials sector because they have been excluded
from the analysis.
26
Median
Repatriated Amount ($MM)
122.6
Fraction of Market Value (%)
5.1
Fraction of Book Assets (%)
6.3
Firms in PR
Mean
Total
788.8 276097.1
5274.8
20.9
Median
6050.0
9.3
20.3
Firms in PB
Mean
Total
7400.1 192402.0
11.9
22.7
Table 3: The median, mean, and total repatriation amounts, in millions of dollars, are
reported for all firms in PR , my sample population of repatriating firms, as well as for all
firms in PB , the subset of repatriating firms in my sample that repatriated at least $2 billion.
Repatriation amounts are also expressed as fractions of the market value of equity at the
end of the 2004 fiscal year, and the mean and median levels are reported in the second row.
The corresponding fractions relative to book asset value at the end of the 2004 fiscal year are
reported in the third row. All repatriation amounts are figures reported in public financial
statements and may in some cases also reflect portions of dividends from subsidiaries that
did not qualify for favorable treatment under §965.
PR
PB
PN
N Num. w/Data Median
350
341
2.9
26
26
70.4
456
446
0.7
Mean
13.9
83.0
4.2
Std. Dev.
36.5
62.8
16.1
Total
4730.2
2156.9
1871.6
Table 4: Market values for the equity of firms in the several sample populations are reported.
The values are determined on the closing date of the 2004 fiscal year for each firm, and the
amounts are stated in billions of dollars.
27
Firms
N
X/Lagged Assets
Mean Std. Dev.
Equity Financing
Equity Purchase (PRSTKC)
Equity Sale (SSTK)
Net Equity Repurchase (PRSTKC-SSTK)
Dividend Payments (DV)
455
455
454
456
4948 0.024
5196 0.075
4844 −0.036
5262 0.009
0.055
0.749
0.609
0.029
Debt Financing
Long-Term Debt Reduction (DLTR)
Long-Term Debt Issuance (DLTIS)
Net Long-Term Debt Reduction (DLTR-DLTIS)
Short-Term Debt Change (DLCCH)
456
456
455
380
5194 0.095
5046 0.115
4932 −0.018
2731 −0.002
0.312
0.354
0.157
0.047
Investments and Spending
Acquisitions (AQC)
Capital Expenditures (CAPX)
Sale of PPE (SPPIV)
Pension (XPR)
R&D (XRD)
Executive Compensation (TCC)
455
456
456
431
336
310
5111 0.041
5294 0.051
5108 −0.003
4636 0.007
3632 0.074
3423 0.004
0.157
0.082
0.036
0.012
0.108
0.005
Table 5: For each variable, the number of non-repatriating firms observed is listed under
the heading “Firms,” and the total number of non-repatriating firm-years observed is listed
under the heading “N.” The columns labeled “Mean” and “Std. Dev.” report the mean
and standard deviation of the variables, divided by lagged total assets, computed over all
firm-years observed. The data for the variables come from Compustat, except for executive
compensation, which represents the sum of all total current compensation (TCC) values
reported in the ExecuComp database for a given year. The Compustat and ExecuComp
data codes for each variable are listed in parentheses.
28
X/Lagged Assets
Mean Std. Dev.
X/Repat. Amt.
25%-ile 75%-ile
Firms
N
Equity Financing
Equity Purchase (PRSTKC)
Equity Sale (SSTK)
Net Equity Repurchase (PRSTKC-SSTK)
Dividend Payments (DV)
334
332
331
335
3814
3774
3643
3933
0.041
0.026
0.015
0.016
0.088
0.225
0.229
0.025
0.000
0.020
−0.055
0.000
0.812
0.331
0.565
0.523
Debt Financing
Long-Term Debt Reduction (DLTR)
Long-Term Debt Issuance (DLTIS)
Net Long-Term Debt Reduction (DLTR-DLTIS)
Short-Term Debt Change (DLCCH)
335
335
335
290
3873 0.092
3787 0.113
3715 −0.019
2411 −0.003
0.257
0.293
0.125
0.045
0.017
0.000
−0.329
−0.163
1.956
2.179
0.310
0.044
Investments and Spending
Acquisitions (AQC)
Capital Expenditures (CAPX)
Sale of PPE (SPPIV)
Pension (XPR)
R&D (XRD)
Executive Compensation (TCC)
328
335
335
328
248
289
3599 0.042
3932 0.054
3709 −0.003
3667 0.007
2778 0.057
3275 0.002
0.125
0.061
0.027
0.008
0.074
0.004
0.000
0.233
−0.012
0.027
0.163
0.007
0.480
1.688
0.000
0.261
1.005
0.059
Table 6: For each variable, the number of repatriating firms observed is listed under the
heading “Firms”, and the total number of firm-years observed for repatriating firms is listed
under the heading “N.” The columns labeled “Mean” and “Std. Dev.” report the mean
and standard deviation of the variables, scaled by lagged total assets, computed over all
firm-years observed for repatriating firms. The columns labeled “25%-ile” and “75%-ile”
report the first and third quartile values for the variables, scaled by the amount repatriated,
computed over all firm-years observed for repatriating firms. The data for the variables come
from Compustat, except for executive compensation, which represents the sum of all total
compensation (TDC1) values reported in the ExecuComp database for a given year. The
Compustat and ExecuComp data codes for each variable are listed in parentheses.
29
β
γ
Equity Purchase
Total
Yearly
0.0031
(0.0027)
Equity Sale
Total
Yearly
0.0750∗∗∗
(0.0197)
Net Equity Repurchase
Total
Yearly
−0.0506∗∗∗
(0.0178)
Dividend Payments
Total
Yearly
0.0001
(0.0009)
0.0013
(0.0008)
0.0011
(0.0033)
−0.0014
(0.0028)
0.0004∗∗∗
(0.0001)
β1
0.0026
(0.0040)
0.0778∗∗∗
(0.0228)
−0.0554∗∗∗
(0.0197)
0.0005
(0.0019)
β2
0.0116∗∗
(0.0046)
0.0772∗∗∗
(0.0230)
−0.0391∗∗
(0.0196)
−0.0009
(0.0015)
β3
0.0127∗
(0.0065)
0.0813∗∗∗
(0.0231)
−0.0443∗∗
(0.0210)
−0.0001
(0.0012)
β4
0.0103∗
(0.0053)
0.0812∗∗∗
(0.0225)
−0.0520∗∗
(0.0210)
−0.0010
(0.0016)
β5
−0.0082∗∗
(0.0037)
0.0693∗∗∗
(0.0203)
−0.0586∗∗∗
(0.0204)
0.0005
(0.0011)
β6
−0.0102∗∗∗
(0.0035)
0.0820∗∗∗
(0.0208)
−0.0703∗∗∗
(0.0197)
0.0004
(0.0013)
β7
0.0003
(0.0041)
0.0520∗∗∗
(0.0194)
−0.0331∗
(0.0189)
0.0011
(0.0016)
γ1
−0.0002
(0.0004)
0.0083∗
(0.0044)
−0.0114∗∗∗
(0.0034)
0.0000
(0.0001)
−0.0024
(0.0033)
0.0075∗∗∗
(0.0025)
0.0005∗∗∗
(0.0001)
γ2
0.0063∗∗∗
(0.0006)
γ3
−0.0009
(0.0006)
−0.0059∗
(0.0034)
0.0022
(0.0025)
0.0005∗∗∗
(0.0001)
γ4
−0.0008
(0.0007)
0.0018
(0.0030)
−0.0037
(0.0023)
0.0004∗∗∗
(0.0001)
γ5
0.0025∗∗∗
(0.0007)
0.0017
(0.0031)
−0.0005
(0.0025)
0.0004∗∗∗
(0.0001)
γ6
0.0013∗
(0.0007)
0.0049
(0.0031)
−0.0042∗
(0.0023)
0.0004∗∗∗
(0.0001)
γ7
0.0009
(0.0007)
−0.0008
(0.0038)
0.0004
(0.0037)
0.0003∗∗
(0.0002)
Obs.
nR
nN
Adj. r 2
8923
349
455
0.2897
8923
349
455
0.2916
9131
347
455
0.1147
9131
347
455
0.1135
8636
346
454
0.1254
8636
346
454
0.1242
9368
350
456
0.3527
9368
350
456
0.3520
Table 7: The table reports the results of the regressions in (1) and (2) for the regressions
in which the dependent variable is equity purchase, equity sale, net equity repurchase, or
dividend payments. The columns labeled “Total” report the β coefficient from the regression
in (1). The columns labeled “Yearly” report the coefficients of the βj coefficients, for j =
1, . . . 7, from the regression in (2). Robust standard errors for the coefficients are reported in
parentheses. Results significant at the p = 0.10, p = 0.05, and p = 0.01 levels are indicated
with “*,” “**,” and “***,” respectively. The bottom three rows report the total number of
firm-years observed for each regression, the number of firms used in each regression coming
from each of the groups PR and PN , and the adjusted r 2 value for each regression.
30
β
γ
Long-Term
Debt Reduction
Total
Yearly
0.0019
(0.0079)
−0.0031
(0.0027)
Long-Term
Debt Issuance
Total
Yearly
0.0018
(0.0100)
Net Long-Term
Debt Reduction
Total
Yearly
0.0008
(0.0059)
0.0012
(0.0026)
0.0008
(0.0084)
Short-Term
Debt Change
Total
Yearly
0.0005
(0.0027)
−0.0004
(0.0039)
β1
−0.0024
(0.0107)
−0.0016
(0.0136)
−0.0011
(0.0084)
0.0025
(0.0046)
β2
−0.0032
(0.0117)
0.0004
(0.0166)
−0.0017
(0.0100)
0.0050
(0.0042)
β3
−0.0187
(0.0127)
−0.0164
(0.0169)
−0.0022
(0.0099)
−0.0063
(0.0043)
β4
−0.0127
(0.0123)
−0.0183
(0.0167)
0.0072
(0.0104)
0.0067
(0.0042)
β5
0.0011
(0.0123)
0.0015
(0.0147)
−0.0005
(0.0081)
−0.0065
(0.0045)
β6
0.0165
(0.0176)
0.0144
(0.0192)
0.0030
(0.0073)
−0.0015
(0.0039)
β7
0.0417
(0.0259)
0.0414
(0.0281)
0.0019
(0.0090)
0.0037
(0.0040)
γ1
0.0006
(0.0029)
−0.0047
(0.0059)
0.0021
(0.0085)
−0.0096
(0.0343)
γ2
−0.0029
(0.0033)
0.0039
(0.0030)
0.0019
(0.0086)
−0.0029
(0.0209)
γ3
−0.0023
(0.0033)
0.0037
(0.0027)
0.0003
(0.0087)
0.0061∗
(0.0035)
γ4
−0.0053∗∗
(0.0024)
−0.0003
(0.0068)
0.0020
(0.0085)
−0.0058∗
(0.0034)
γ5
−0.0043
(0.0032)
−0.0017
(0.0021)
0.0016
(0.0085)
0.0042
(0.0034)
γ6
−0.0039
(0.0024)
0.0011
(0.0063)
−0.0014
(0.0086)
−0.0014
(0.0033)
γ7
−0.0065∗
(0.0036)
−0.0004
(0.0027)
−0.0008
(0.0087)
−0.0043
(0.0033)
Obs.
nR
nN
Adj. r 2
9237
350
456
0.4725
9237
350
456
0.4724
8996
350
456
0.3815
8996
350
456
0.3812
8807
350
455
0.0008
8807
350
455
-0.0005
5238
302
380
-0.0060
5238
302
380
-0.0050
Table 8: The table reports the results of the regressions in (1) and (2) for the regressions
in which the dependent variable is long-term debt reduction, long-term debt issuance, net
long-term debt reduction, or change in short-term debt. The coefficients and other items
reported are analogous to those reported in Table 7.
31
β
γ
Acquisitions
Total
Yearly
0.0001
(0.0054)
Capital Expenditures
Total
Yearly
0.0033∗
(0.0019)
R&D Expense
Total
Yearly
0.0074∗∗
(0.0033)
0.0005
(0.0017)
0.0006
(0.0004)
0.0009∗∗
(0.0004)
TCC
Total
Yearly
0.0007∗∗∗
(0.0002)
−0.0004
(0.0005)
β1
0.0041
(0.0080)
0.0063∗∗
(0.0025)
0.0062∗
(0.0034)
0.0003
(0.0002)
β2
0.0119
(0.0110)
0.0017
(0.0023)
0.0082∗∗
(0.0038)
0.0004∗∗
(0.0002)
β3
0.0045
(0.0100)
0.0020
(0.0027)
0.0139∗∗∗
(0.0048)
0.0004∗∗
(0.0002)
β4
−0.0120
(0.0121)
0.0036
(0.0026)
0.0087∗∗
(0.0041)
0.0008∗∗∗
(0.0002)
β5
−0.0108
(0.0077)
0.0055∗∗
(0.0025)
0.0060
(0.0041)
0.0008∗∗∗
(0.0002)
β6
0.0010
(0.0063)
0.0012
(0.0030)
0.0063
(0.0040)
0.0011∗∗∗
(0.0002)
β7
0.0009
(0.0086)
0.0020
(0.0028)
0.0017
(0.0044)
0.0013∗∗∗
(0.0003)
γ1
0.0004
(0.0021)
0.0004
(0.0007)
0.0012∗∗
(0.0005)
−0.0004
(0.0008)
γ2
0.0003
(0.0020)
0.0016∗∗
(0.0006)
0.0006
(0.0005)
0.0001
(0.0006)
γ3
0.0007
(0.0018)
0.0007
(0.0010)
0.0005
(0.0005)
−0.0004
(0.0008)
γ4
−0.0003
(0.0026)
0.0001
(0.0004)
0.0010
(0.0007)
−0.0002
(0.0007)
γ5
−0.0004
(0.0020)
−0.0000
(0.0005)
0.0008∗
(0.0005)
0.0002
(0.0007)
γ6
0.0015
(0.0017)
0.0008∗
(0.0004)
0.0011∗∗
(0.0005)
−0.0014
(0.0009)
γ7
0.0011
(0.0017)
0.0009∗∗
(0.0004)
0.0010∗
(0.0006)
−0.0013
(0.0011)
Obs.
nR
nN
Adj. r 2
8872
343
455
0.0466
8872
343
455
0.0457
9399
350
456
0.4107
9399
350
456
0.4101
6526
258
336
0.5303
6526
258
336
0.5296
6833
303
310
0.6212
6833
303
310
0.6214
Table 9: The table reports the results of the regressions in (1) and (2) for the regressions in
which the dependent variable is acquisitions, capital expenditures, research and development
expense, or total current executive compensation. The coefficients and other items reported
are analogous to those reported in Table 7.
32
β
γ
Equity Purchase
Total
Yearly
−0.0067
(0.0086)
Equity Sale
Total
Yearly
0.1330∗∗∗
(0.0356)
Net Equity Repurchase
Total
Yearly
−0.1100∗∗∗
(0.0293)
−0.0206
(0.0212)
0.0549
(0.1256)
−0.0551
(0.1227)
Dividend Payments
Total
Yearly
0.0064∗∗∗
(0.0022)
−0.0415∗∗∗
(0.0094)
β1
−0.0141
(0.0120)
0.1383∗∗∗
(0.0397)
−0.1155∗∗∗
(0.0369)
0.0024
(0.0026)
β2
0.0083
(0.0184)
0.1528∗∗∗
(0.0402)
−0.1243∗∗∗
(0.0317)
0.0039
(0.0028)
β3
0.0034
(0.0128)
0.1163∗∗∗
(0.0435)
−0.0743∗
(0.0398)
0.0054∗
(0.0032)
β4
0.0028
(0.0156)
0.1066∗∗
(0.0416)
−0.0778∗∗
(0.0371)
0.0057
(0.0040)
β5
−0.0107
(0.0113)
0.1440∗∗∗
(0.0383)
−0.1334∗∗∗
(0.0324)
0.0100∗∗∗
(0.0038)
β6
−0.0139
(0.0152)
0.1230∗∗∗
(0.0421)
−0.1130∗∗∗
(0.0373)
0.0098
(0.0071)
β7
−0.0305
(0.0211)
0.1169∗∗∗
(0.0423)
−0.1321∗∗∗
(0.0414)
0.0061
(0.0077)
γ1
0.0211
(0.0404)
−0.0621
(0.1218)
0.0476
(0.1484)
−0.0419∗∗∗
(0.0107)
γ2
−0.0150
(0.0361)
−0.1066
(0.1133)
0.1450
(0.1089)
−0.0443∗∗∗
(0.0099)
γ3
−0.0367∗
(0.0213)
0.1825
(0.1734)
−0.1925
(0.1693)
−0.0379∗∗∗
(0.0146)
γ4
−0.0229
(0.0463)
0.2930∗∗
(0.1181)
−0.2698∗∗
(0.1305)
−0.0366∗∗
(0.0154)
γ5
−0.0404
(0.0270)
0.0418
(0.1095)
−0.0303
(0.0910)
−0.0459∗∗∗
(0.0168)
γ6
−0.0889
(0.0542)
0.1235
(0.1881)
−0.1380
(0.1784)
−0.0333
(0.0325)
γ7
0.0713
(0.0818)
0.1037
(0.2048)
0.0574
(0.2009)
−0.0400
(0.0423)
Obs.
nR
nN
Adj. r 2
5249
26
455
0.3291
5249
26
455
0.3290
5478
26
455
0.1438
5478
26
455
0.1418
5119
26
454
0.1590
5119
26
454
0.1568
5570
26
456
0.3130
5570
26
456
0.3117
Table 10: The table reports selected results of the regressions in (1) and (2), performed
subject to the restriction that firms repatriating $500 million or less are excluded from the
analysis. The dependent variables for which results are reported are equity purchases (not
net of issuance), long-term debt issuance (not netted with reductions), acquisitions, capital
expenditures, research and development expense, and total executive compensation. The
coefficients and other items reported are analogous to those reported in Table 7.
33
β
γ
Acquisitions
Total
Yearly
−0.0035
(0.0287)
0.1761
(0.1510)
Capital Expenditures
Total
Yearly
0.0006
(0.0043)
R&D Expense
Total
Yearly
0.0038
(0.0096)
0.0037
(0.0146)
0.0580
(0.0481)
TCC
Total
Yearly
0.0018∗∗∗
(0.0002)
−0.0000
(0.0005)
β1
0.0428
(0.0497)
0.0008
(0.0058)
0.0122∗∗
(0.0060)
0.0004∗
(0.0002)
β2
0.0014
(0.0146)
0.0018
(0.0049)
0.0149∗∗
(0.0062)
0.0010∗∗∗
(0.0002)
β3
0.0141
(0.0250)
−0.0027
(0.0051)
0.0151∗∗
(0.0075)
0.0017∗∗∗
(0.0002)
β4
−0.1612∗∗∗
(0.0398)
−0.0027
(0.0051)
−0.0289∗∗
(0.0138)
0.0022∗∗∗
(0.0002)
β5
0.0232
(0.0259)
−0.0009
(0.0052)
0.0150∗
(0.0086)
0.0024∗∗∗
(0.0002)
β6
0.0592
(0.0578)
0.0029
(0.0061)
0.0074
(0.0079)
0.0025∗∗∗
(0.0002)
β7
−0.0002
(0.0236)
0.0002
(0.0071)
0.0020
(0.0086)
0.0025∗∗∗
(0.0002)
γ1
−0.0144
(0.0662)
0.0058
(0.0212)
−0.0157
(0.0151)
0.0004
(0.0005)
γ2
0.0121
(0.0318)
−0.0039
(0.0166)
−0.0075
(0.0153)
0.0004
(0.0005)
γ3
0.0249
(0.0567)
0.0004
(0.0131)
0.0127
(0.0157)
0.0000
(0.0004)
γ4
0.9053∗∗∗
(0.2081)
0.0078
(0.0133)
0.2730∗∗∗
(0.0700)
0.0000
(0.0004)
γ5
0.0069
(0.0601)
0.0062
(0.0171)
0.0347
(0.0349)
−0.0000
(0.0004)
γ6
0.1679
(0.2724)
0.0182
(0.0246)
0.0246
(0.0338)
−0.0002
(0.0008)
γ7
0.1170
(0.0783)
0.0217
(0.0306)
0.0175
(0.0457)
−0.0003
(0.0007)
Obs.
nR
nN
Adj. r 2
5343
22
455
0.0270
5343
22
455
0.0302
5599
26
456
0.3272
5599
26
456
0.3257
3898
23
336
0.5017
3898
23
336
0.5015
3727
26
310
0.6320
3727
26
310
0.6317
Table 11: The table reports selected results of the regressions in (1) and (2), performed
subject to the restriction that firms repatriating $500 million or less are excluded from the
analysis. The dependent variables for which results are reported are equity purchases (not
net of issuance), long-term debt issuance (not netted with reductions), acquisitions, capital
expenditures, research and development expense, and total executive compensation. The
coefficients and other items reported are analogous to those reported in Table 7.
34
G Index
E Index
Firms N Obs. Median
All
549 5551
9.0
PR
264 2782
10.0
All
PR
517 5239
250 2634
3.0
3.0
Mean
9.4
9.7
Std. Dev.
2.6
2.7
Min.
2.0
3.0
Max.
18.0
18.0
2.5
2.5
1.2
1.3
0.0
0.0
6.0
5.0
Table 12: The first row reports summary statistics for the G index for all firms in the
combined population of all firms in my sample. The second row reports the corresponding
statistics for only the firms in PR . The third and fourth rows report statistics for the E
index. Index values are not available for all firms, and the column labeled “N” reports the
number of firms for which values are available. The column labeled “Obs.” reports the
number of total firm-year observations on which the summary statistics are based.
.
35
βG
γG
Equity Purchase
Total
Yearly
0.0030∗∗∗
(0.0008)
Equity Sale
Total
Yearly
−0.0001
(0.0007)
0.0120
(0.0076)
−0.0209∗∗
(0.0086)
Net Equity Repurchase
Total
Yearly
0.0028∗∗
(0.0012)
−0.0292∗∗
(0.0144)
Dividend Payments
Total
Yearly
0.0003
(0.0003)
−0.0134∗∗∗
(0.0018)
βG1
0.0046∗∗∗
(0.0017)
0.0005
(0.0009)
0.0034∗∗
(0.0013)
−0.0000
(0.0005)
βG2
0.0044∗∗
(0.0018)
0.0007
(0.0007)
0.0036∗
(0.0019)
−0.0000
(0.0004)
βG3
0.0029
(0.0018)
0.0012
(0.0011)
−0.0007
(0.0020)
0.0006∗
(0.0003)
βG4
0.0067∗∗∗
(0.0019)
βG5
0.0011
(0.0011)
βG6
0.0082∗∗∗
(0.0023)
0.0005
(0.0003)
0.0003
(0.0007)
0.0010
(0.0014)
0.0000
(0.0006)
−0.0009
(0.0013)
−0.0003
(0.0007)
−0.0013
(0.0014)
0.0003
(0.0004)
βG7
0.0008
(0.0019)
−0.0003
(0.0009)
0.0008
(0.0022)
0.0011
(0.0007)
γG1
−0.0208
(0.0170)
−0.0339∗∗
(0.0152)
−0.0077∗∗
(0.0031)
γG2
−0.0542∗∗∗
(0.0167)
−0.0500∗∗∗
(0.0182)
−0.0109∗∗∗
(0.0021)
γG3
−0.0327∗
(0.0198)
0.0051
(0.0093)
−0.0019
(0.0261)
−0.0145∗∗∗
(0.0033)
γG4
−0.0511∗∗
(0.0242)
0.0358∗∗∗
(0.0119)
−0.0847∗∗∗
(0.0305)
−0.0148∗∗∗
(0.0031)
γG5
−0.0096
(0.0088)
0.0054
(0.0046)
−0.0165
(0.0107)
−0.0154∗∗∗
(0.0029)
γG6
0.0188
(0.0162)
0.0094
(0.0073)
0.0169
(0.0167)
−0.0161∗∗∗
(0.0048)
γG7
0.0300
(0.0327)
−0.0017
(0.0110)
0.0367
(0.0377)
−0.0192∗∗∗
(0.0054)
Obs.
nR
nN
Adj. r 2
5318
262
284
0.3867
5318
262
284
0.3928
−0.0019∗
(0.0010)
0.0153∗∗
(0.0059)
−0.0006
(0.0061)
5322
259
284
0.1317
5322
259
284
0.1321
5100
258
282
0.2434
5100
258
282
0.2486
5526
263
285
0.5601
5526
263
285
0.5597
Table 13: The table reports results of the regressions in (3) and (4) for regressions in which
the dependent variable is dividends, net long-term debt repurchase, acquisitions, pension
expense, or executive compensation. The format of reported results is analogous to that in
Table 7, but the coefficients are now βG and βGj instead of β and βj .
36