Bond market Association holidays

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Susan M. Albring is an Assistant Professor at Syracuse University, Lillian F. Mills is a Professor at The University of Texas at Austin, and Kaye J. Newberry is a Professor at the University of Houston.

We appreciate able research assistance from John Chan. We also thank Jennifer Blouin, Jay Hartzell, Ken Klassen, Richard Sansing (editor), Thomas Schultz, three anonymous referees, participants at the 2007 American Accounting Association Annual Meeting, and participants at the 2010 JATA Conference for helpful comments and suggestions. Financial assistance from the Martin J. Whitman School of Management is gratefully acknowledged.

We examine whether U.S. multinationals' private and public debt constraints influence their responses to a temporary reduction in repatriation taxes (tax holiday). Using a sample of 421 U.S. multinationals with permanently reinvested earnings, we find that external debt constraints played an important role in determining their responses to the tax holiday. Specifically, we find that firms subject to fewer financial covenants in their private debt agreements or with greater access to public bond markets repatriated significantly more of their eligible funds. Our results suggest that U.S. multinationals with greater access to external debt markets have more flexibility to time their repatriations around a tax holiday and, as such, they are the primary beneficiaries of any tax savings. It is unlikely that these firms were the intended target of the American Jobs Creation Act (AJCA) 2004, given the stated legislative goals of directing repatriated funds toward financial stabilization and previously unfunded positive return investments.

JEL Classifications: M4; H2; L1.

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Volume 33, Issue 2
(Fall 2011)

The Journal of the American Taxation Association

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