| The repatriation tax holiday enacted by the American Jobs Creation Act of 2004 mandated that the proceeds be used for investment. However, the academic literature has found this mandate to be ineffective (Blouin and Krull, 2009). In this paper, I examine the determinants of using tax savings for investment purposes. Using the cash flow statement identity, I estimate how firms allocate permanent tax savings, temporary tax savings, and their other operating cash flows among the following uses: investment, holding as cash, or reducing debt or equity. I find that temporary tax savings are used for investment to a greater extent than permanent tax savings or cash flow from operations, and that investment levels are partially sticky after temporary savings reverse. I also find that financially constrained firms and domestic firms invest a larger portion of their tax savings than fully invested firms or multinational firms. Finally, I show that tax savings from accelerated tax depreciation are invested at a greater rate than savings from the AJCA repatriation tax holiday. My results suggest that policymakers interested in ensuring tax savings are invested should offer temporary tax savings to domestic, financially constrained firms. |
