U.S. multinational corporations' income shifting incentives and share repurchases: Evidence across differential taxation systems

Abstract

This study examines the association between income-shifting incentives and share repurchases using a sample of US multinational corporations (MNCs) from 2006 to 2020. We find a significant negative (positive) association between income shifting and share repurchases before (after) the enactment of the Tax Cuts and Jobs Act (TCJA) in 2018. The results show that the TCJA only had a short-term effect on the relation between income shifting and share repurchases that was largely confined to 2018 and reverted to pre-TCJA levels in subsequent years. Additionally, the overall negative relationship between income shifting and share repurchases is stronger in firms with high repatriation costs. However, firms with an advance pricing agreement with the Internal Revenue Service evidence a positive association between income shifting and share repurchases. Overall, we provide evidence for the effects of taxation system reforms on MNCs' income-shifting incentives and share repurchase decisions.