A recent publication in the Journal of Financial Economics delves into the impact of the 2017 Tax Cuts and Jobs Act (TCJA) on American multinational corporations. This study was conducted by James F. Albertus and Brent Glover from Carnegie Mellon University’s Tepper School of Business, along with Oliver Levine from the University of Wisconsin-Madison’s School of Business. Their research focused on the effects of the TCJA on corporations’ financial strategies, which unlocked nearly $1.7 trillion in previously unavailable international funds.
The TCJA was designed to boost the economy by encouraging firms to repatriate their foreign earnings and invest them within the United States. Despite the substantial influx of cash, which represented a significant liquidity shock—an unexpected alteration in the availability of money—the findings showed that companies did not increase their investments in capital expenditures, employment, research and development, or mergers and acquisitions, even among those that previously faced challenges in accessing funds. Instead, this new liquidity is primarily used for shareholder payouts and retaining cash, posing a challenge to established financial theories and shedding new light on how corporations react to major tax policy adjustments.
The research utilised data from the Bureau of Economic Analysis to monitor how these repatriated funds were utilised. It was observed that companies with substantial amounts of previously ‘trapped’ cash were more inclined to save rather than invest. According to the researchers, “Firms paid out only about one-third of the new liquidity to shareholders and retained half as cash.” This translates to companies allocating $5 to savings for every $3 distributed to shareholders. This behaviour is at odds with the conventional economic theory, which posits that corporations with excess cash typically invest in profitable ventures or distribute them to shareholders. The study concludes, “The high propensity to retain the liquidity shock as cash, even among well-governed firms with limited financial constraints, is hard to align with existing theory.”
These findings raise critical questions regarding the efficacy of tax cuts as a mechanism for stimulating economic growth. The study indicates that other elements, such as future uncertainties or a preference for financial stability, might influence these decisions to accumulate cash. The researchers highlighted, “The high retention [of cash] was not associated with poor governance,” suggesting that even well-managed companies opted to save. This research underlines the need for a more comprehensive understanding of the factors influencing corporate financial decisions and the complex interplay between tax policy and corporate behaviour.
More information: James F. Albertus et al, The real and financial effects of internal liquidity: Evidence from the Tax Cuts and Jobs Act, Journal of Financial Economics. DOI: 10.1016/j.jfineco.2025.104006
Journal information: Journal of Financial Economics Provided by Carnegie Mellon University