The effect of foreign cash holdings on returns during repatriation tax holidays : a study of the American jobs creation act of 2004
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- Master Thesis 
On October 22, 2004, President George W. Bush enacted a repatriation tax holiday under the American Jobs Creation Act. It allowed companies incorporated in the U.S. to repatriate foreign earnings at a reduced effective tax rate of 5.25 percent, instead of the usual 35 percent tax rate. In this thesis, we analyze how the level of foreign cash holdings relative to company size affect the company returns during the American Jobs Creation Act of 2004? To answer our research question we conduct two event studies. The first event study is the introduction date of the American Jobs Creation Act on June 4, 2004, whilst the second, October 22, 2004, is the date the act was enacted into law. We use hand collected permanently reinvested earnings data as a proxy for foreign cash holdings and investigate how different levels of permanently reinvested earnings affect cumulative abnormal returns during the two events. We study S&P 500 companies as many of these companies repatriated foreign earnings during the repatriation tax holiday. Intuitively, we expected that companies with a higher level of foreign cash holdings relative to size would outperform companies with a lower level of foreign cash holdings. However, based on our results, we cannot conclude that the level of foreign cash holdings had an effect on the cumulative abnormal returns. We believe that there are mainly two reasons for these results. First, it could be that different levels of permanently reinvested earnings, our proxy, should affect the cumulative abnormal returns, but that this is not captured in our model. Second, it could simply be that different levels of permanently reinvested earnings do not affect cumulative abnormal returns as investors prioritize other measures when evaluating the effects of the repatriation tax holiday on companies.