Corporate Inversions and Governance

Abstract

The race by American companies to change their incorporation to countries with a lower corporate tax rate (inversion) has reached fever pitch. An open empirical question is if and how such an inversion affects a firm's governance. While many inversions happen to countries that offer weaker protection to minority shareholders than the U.S., we find that most firms that invert continue to be treated by the SEC as an “U.S. issuer”, and thus their shareholders benefit from the full protection offered by the U.S. Federal Securities Laws. Our analysis shows that executives in inverted firms receive more cash compensation and their wealth is less sensitive to stock prices. After an inversion, firms increase the number of anti-takeover charter provisions. Consistent with weaker market-based governance, the stock price of firms that invert is less liquid and the firms have lower institutional ownership. Investors put a lower value on the cash on inverted firm's balance sheet especially if the firm inverts to a country that ranks low in terms of rule of law. Overall, our results highlight that despite enjoying the full protection of U.S. Federal Securities Laws, inverted firms have weaker governance relative to comparable U.S. firms.

Keywords: Corporate inversions, corporate governance, valuation

JEL Classification: G3, F23, K22, G38