Market Pressure and Multinational Corporations’ Tax-Motivated Decisions: Evidence from an SEC Experiment

Abstract

We examine the role of capital market pressure in firms' international tax-motivated decisions. We use two exogenous events to identify the relation: the temporary lifting of short selling restrictions for randomly selected pilot firms under SEC Regulation SHO (called Pilot firms) and the repatriation tax holiday under the American Jobs Creation Act that occurred in this time period. We document that the Pilot firms are more likely to respond to the tax holiday only when they have foreign losses or generally do not repatriate foreign earnings. We also find that Pilot firms repatriate more, on average. This evidence is consistent with managers generally facing a conflict between self-serving international investment decisions and value-enhancing tax-motivated investment decisions, but this situation is mitigated by greater monitoring by active short sellers that occurs when short-selling restrictions are absent.