June 2011
Article
Journal of Finance

Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act

By: Dhammika Dharmapala, C. Fritz Foley and Kristin J. Forbes

Format:Print
| Pages:35

Abstract

This paper analyzes the impact of the Homeland Investment Act of 2004, which provided a one-time tax holiday for the repatriation of foreign earnings and thereby reduced the cost to U.S. multinationals of accessing a source of internal capital. Lawmakers and lobbyists justified its passage by arguing that it would alleviate financial constraints. This paper's results indicate that repatriations did not lead to an increase in domestic investment, domestic employment, or R&D—even for the firms that appeared to be financially constrained or lobbied for the holiday. Instead, estimates indicate that a $1 increase in repatriations was associated with a $0.60 to $0.92 increase in payouts to shareholders—despite regulations stating that such expenditures were not a permitted use of repatriations qualifying for the tax holiday. The results indicate that U.S. multinationals were not financially constrained and were reasonably well governed. The fungibility of money appears to have undermined the effectiveness of the regulations.