Corporate Governance and Extraordinary Earnings Repatriations: Evidence from the American Jobs Creation Act

41 Pages Posted: 7 Dec 2008 Last revised: 26 Jan 2014

See all articles by Ramin Baghai

Ramin Baghai

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Date Written: April 3, 2012


The American Jobs Creation Act of 2004 temporarily reduced the repatriation tax rate on U.S. multinational firms' foreign earnings by 85%. Consequently, approximately $300 billion previously held as cash in foreign subsidiaries were repatriated to the U.S. -- about five times more than in prior years. This study employs this tax holiday and the resulting cash windfall as a natural experiment to study the effect of agency problems on acquisition decisions by firms. I find that shareholders of weakly-governed multinational U.S. firms -- unlike those of well-governed companies -- reacted negatively to the passage of the Act. After the tax holiday, acquisitions by weakly-governed repatriating firms (relative to their well-governed peers) significantly increased. Compared to well-governed firms, acquisitions by weakly-governed firms were more likely to be diversifying and were accompanied by lower abnormal announcement returns. These results are consistent with empire-building models of managerial behavior and suggest that managers protected by more anti-takeover provisions may have used a significant fraction of the repatriated funds to indulge in corporate expansion plans with limited benefits to their shareholders.

Keywords: American Jobs Creation Act, tax holiday, repatriations, corporate governance, tax policy

JEL Classification: F23, G3, G14, G18, H25, H32

Suggested Citation

Baghai, Ramin, Corporate Governance and Extraordinary Earnings Repatriations: Evidence from the American Jobs Creation Act (April 3, 2012). AFA 2010 Atlanta Meetings Paper, Available at SSRN: or

Ramin Baghai (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm

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