AAA Study: Shareholder Payouts to be Modest at Best

Terry Sheridan
Columnist
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As corporate tax reform continues to be a key legislative priority, it raises a vital question: How will a proposed territorial system that allows U.S. multinational companies to bring foreign profits home without facing taxation affect shareholders?

According to a new study published by the American Accounting Association, shareholder payouts are likely to be modest. Why that’s so is at the heart of the study.

Repatriation Tax Costs and U.S. Multinational Companies’ Shareholder Payouts by Assistant Professor Michelle Nessa in Accounting and Information Systems at Michigan State University, reveals that multinational companies have considerable ability to issue shareholder payouts other than through repatriation of their foreign earnings – and that’s most often through borrowing.

In fact, repatriation tax costs have reduced dividends and stock repurchases to shareholders – the two principal types of payouts.

Recently, however, that relationship appears to be weaker, with repatriation taxes limiting dividends while diminishing the likelihood of share repurchases only slightly and the volume of repurchases not at all. If tax reform does indeed create a shift to a territorial system that brings more payouts to shareholders, that’ll most likely happen at financially strapped companies, according to the study.

But would the reform create a bonanza for most multinationals’ shareholders? That’s not likely. “When it comes to payouts, many companies seem to have worked their way around this particular tax barrier already,” Nessa states.

She based her study on the impact of repatriation tax costs on two time periods: the repatriation tax holiday under the American Jobs Creation Act of 2004 and the economic distress during the Great Recession.

Her findings indicate that the higher the cost of repatriation, the less likely companies were to pay dividends to shareholders and the less generous the dividends were that actually were distributed. What’s more, dividends paid as a portion of company assets would have been 14.32 percent less than those paid by a company that didn’t owe taxes.

On the other hand, the study found no significant connection between repatriation tax costs and stock repurchases. However, there was a connection in that regard between financially constrained firms but they were a minority in the study.

"Financially constrained firms will be less able to borrow and/or will face higher borrowing costs than unconstrained firms,” Nessa states in the study. Further, high stock repurchases strongly correlated with high debt, a result that’s consistent with U.S. multinationals that borrow to avoid repatriation taxes.

But why the difference between tax effects on dividends vs. repurchases? It has to do with future commitments.

 “U.S. multinationals could occasionally incur costs (e.g., borrowing, utilizing tax attributes, engaging in complex transactions) that allow them to access the wealth represented by their foreign cash without triggering U.S. repatriation taxes,” Nessa states. “If these cash inflows to the U.S. parent are non-recurring, they are likely to be distributed through share repurchases, because [unlike dividends] share repurchases do not implicitly commit the firm to similar future payouts.”

But during and after the Great Recession – from 2009 through 2014 – the differences in the payouts go away. During that time, neither dividends nor repurchases were significantly related to repatriation taxes. The study, though, doesn’t explore that.

“It may have to do with the extremely low cost of borrowing in the post-recession years,” Nessa states. “There were not any changes in U.S. tax laws related to repatriation that would account for the different results from those of the earlier period studied.”

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