'Looking Through' Corporate Expatriations for Buried Intangibles
University of Illinois College of Business Department of Accountancy
February 19, 2015
U of Chicago, Public Law Working Paper No. 445
This paper represents the first event study of corporate expatriations since Desai and Hines (2002), and is the first study to link corporate expatriation behavior to intangibles. Utilizing a bootstrap methodology, the paper demonstrates that corporate expatriations – whether naked inversions or redomiciliations in the context of business combinations – generate statistically and economically significant excess returns on the order of 225% above market returns in the years following the inversion. Moreover, notwithstanding the public nature of the inversion announcement, which should be a signal of extraordinary future profits, there has historically been no price response to the signal. Their inability to send a credible signal of future profits provides corporate managers the opportunity to reorganize outside the U.S. at a reduced tax cost, if they believe that the benefits to expatriation outweigh the cost. My hypothesis is that this cost-benefit analysis results in expatriation when managers believe that they have asymmetric information as to the value of future income growth attributable to intangibles. After controlling for industry and the standard market risk factors, I present results based on the reported geographic distribution of earnings suggesting that these excess returns are largely attributable to non-U.S. subsidiaries in the ten years following the inversion, consistent with my hypothesis.
Number of Pages in PDF File: 40
Keywords: corporate taxation, international taxation, corporate inversion, multinational, tax haven, commensurate with income, Fama-French, firm value, tax avoidance, asset allocation, efficient markets, stock price
Date posted: August 15, 2013 ; Last revised: March 14, 2015
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