Dividend Policy inside the Multinational Firm

Three factors significantly influence profit repatriations by U.S. multinational firms: tax considerations, domestic financing and investment needs, and agency problems inside firms. Dividend repatriations are surprisingly persistent and resemble dividend payments to external shareholders. Tax considerations are influential but not decisive. Affiliates whose organizational forms carry differing tax treatments nonetheless feature similar repatriation polices, and certain firms incur avoidable tax penalties by simultaneously repatriating profits and investing new equity. Parental financing needs also matter, as parents with larger dividend payouts to external shareholders, and highly levered parent companies with profitable domestic investment opportunities, draw on the resources of their foreign affiliates. Finally, affiliates that are incompletely controlled are more likely than others to make regularized dividend payments and to trigger avoidable tax costs through repatriations. Taken together, the results indicate that traditional corporate finance concerns – taxation, costly external finance, and agency problems – are also critical to the internal capital markets of multinational firms. JEL Classifications: F23, G31, G35, H25, H87. Mihir A. Desai C. Fritz Foley James R. Hines Jr. Harvard Business School Harvard Business School Department of Economics Baker 265 Baker 265 University of Michigan Soldiers Field Soldiers Field 611 Tappan Street Boston, MA 02163 Boston, MA 02163 Ann Arbor, MI 48109-1220 [email protected] [email protected] [email protected]