Unlocked Trapped Foreign Cash, Investor Horizons & Firm Payout Policy

• In Event: Doctoral Student-Faculty Interchange: Financial Reporting I

Abstract

I seek to address whether institutional investor horizons influence firm payout policy driven by
trapped foreign cash holdings of U.S. multinationals which are “unlocked” as a result of the Tax
Cuts and Jobs Act of 2017 (TCJA). I base my predictions on prior empirical work rooted in an
established corporate finance theoretical model which finds that the amount of repurchases made
by a firm should be increasing (decreasing) in a firm’s short-horizon (long-horizon) institutional
ownership. Using a differences-in-differences approach, I find that firm repurchase behavior
follows the theoretical predictions in the wake of the TCJA and that the effect is strongest for firms
with higher levels of unlocked trapped foreign cash (UFC). Interestingly, whether the level of
unlocked trapped foreign cash alone (absent horizon variables) has enough power to explain the
shift in firm repurchase behavior after the passage of the TCJA depends on the specification
utilized. However, analyses which incorporate investor horizons are robust to all of these different
design choices. These results suggest that it is indeed the interaction of unlocked trapped foreign
cash with investor horizons which truly explains firm payout behavior in the wake of the TCJA.
This finding should inform academics of the causal mechanisms which drive firm payout, and
provide policymakers with information to help assess social welfare implications of tax holidays

Author

• Erik Olson, Yale University