'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. Because the tax cost of the inversion transaction is based on market price, 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. After providing evidence on the abnormal profits associated with inversion transactions, this paper seeks to trace the source of these returns and, after controlling for industry and the standard market risk factors, provides the first evidence of a strong association between inversion transactions and revenue growth attributable to intangibles in non-U.S. subsidiaries in the ten years following the inversion transaction.
Number of Pages in PDF File: 45
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: May 14, 2015
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