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Did Debt Constraints Influence U.S. Multinationals' Repatriations and Repayment of Debt with Their Holiday Cash?
Susan M Albring,
University of South Florida
Lillian F Mills, University of Texas at Austin
Kaye J Newberry, University of Houston
ABSTRACT. One permitted use of cash repatriated under the dividend tax holiday in the American Jobs Creation Act (AJCA) of 2004 was to repay corporate debt. We find evidence that those firms making substantive repatriations have more access to public debt markets and are less likely to have financial covenants in their private lending agreements. These findings suggest that firms with the most binding constraints likely repatriated their foreign earnings prior to the tax holiday. We also find that among firms that repatriated foreign earnings under the tax holiday, debt constraints explain the choice to use the funds to make significant debt repayments. Further, these firms are more likely to repay debt than to repurchase their stock. These results suggest that debt markets provide fiscal discipline even in the presence of events that provide managers with windfall liquidity.
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