Taxation of International Investment and Accounting Valuation
Anja De Waegenaere, Tilburg University
Richard C. Sansing, Dartmouth College and Tilburg University
ABSTRACT. This paper develops a model of a firm's foreign investment decisions and characterizes its optimal investment and repatriation strategies. It then derives the theoretical relation between the level of a foreign subsidiary's permanently reinvested foreign earnings and the value of the subsidiary to the parent. It shows that the valuation relevance of permanently reinvested earnings depends on whether the earnings are invested in operating assets or financial assets. It also shows the effects of a temporary "tax holiday" on firm value.
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