The U.S. Tax and Financial Reporting Treatment of Foreign Earnings and U.S. Multinational Companies' Payout Policies

Abstract

This paper examines the impact of the U.S. tax and financial reporting treatment of foreign earnings on the payouts to shareholders of U.S. multinational companies (MNCs). I find the U.S. tax and financial reporting treatment of foreign earnings weakens the otherwise strong, positive association between foreign earnings and the probability and level of dividend payments, but I do not observe an effect on the probability or level of share repurchases or on the level of total payout. I also find U.S. MNCs with tax and/or financial reporting incentives to keep their foreign profits reinvested abroad make more extensive use of repurchases than dividends when making distributions to shareholders. This study contributes to our understanding of the impact of the current U.S. worldwide tax system on U.S. MNCs' real decisions. TABLE OF CONTENTSLIST LIST OF TABLES LIST OF ABBREVIATIONS Dependent Variables:Dividendsit = dividends paid to common shareholders (dvc) by firm i in year t. DivIndit = 1 if Dividendsit > 0, and 0 otherwise. DivLevit = Dividendsit, scaled by total assets (at) at the end of year t-1. Repurchasesit = purchases of common and preferred stock by firm i in year t (prstkc) less any decrease in the redemption value of preferred stock from year t-1 to year t (pstkrv), or less any decrease in preferred stock (pstk) from year t-1 to year t if the redemption value of preferred stock is missing. RepIndit = 1 if Repurchasesit > 0, and 0 otherwise. RepLevit = Repurchasesit, scaled by total assets (at) at the end of year t-1.PayInd it = 1 if Dividendsit or Repurchasesit > 0, and 0 otherwise. PayLevit = sum of Dividendsit and Repurchasesit, scaled total assets (at) at the end of year t-1. RepMixit = Repurchasesit minus Dividendsit, scaled by total assets (at) at the end of year t-1 if PayIndit = 1, and missing otherwise. RepRatioit = Repurchasesit divided by total payout (Dividendsit plus Repurchasesit) if PayIndit = 1, and missing otherwise. Primary Independent Variables of Interest:LowFETR5it = 1 if FETRit is five or more percentage points below the U.S. statutory tax rate in year t, and 0 otherwise. FETRit equals current foreign tax expense of firm i (txfo) summed over years t-2 to t divided by foreign pre-tax income (pifo) summed over years t-2 to t for firms with positive three-year cumulative foreign pre-tax income and is winsorized to lie between zero and one. If firm i's threeyear cumulative foreign pre-tax income is zero or negative, LowFETR5it equals zero. LowFETR10it = 1 if FETRit is ten or more percentage points below the U.S. statutory tax rate in year t, and 0 otherwise. If firm i's three-year cumulative foreign pretax income is zero or negative, LowFETR10it equals zero. eFORit = foreign pre-tax income (pifo) of firm i in year t, scaled by total assets (at) at the end of year t-1. eUSit = domestic pre-tax income (pidom) of firm i in year t, scaled by total assets (at) at the end of year t-1. If domestic pre-tax income is missing, it is set equal to the difference between total pre-tax incom...