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Are Corporate Inversions Good for Shareholders?

59 Pages Posted: 10 Dec 2015 Last revised: 12 Aug 2017

Anton Babkin

University of Wisconsin - Madison

Brent Glover

Carnegie Mellon University - David A. Tepper School of Business

Oliver Levine

University of Wisconsin - Madison

Date Written: July 3, 2017

Abstract

Corporate inversion, the process of redomiciling for tax purposes, reduces corporate income taxes, but it imposes a personal tax cost that is shareholder-specific. We develop a model, incorporating the corporate tax benefits and personal tax costs, to quantify the return to inversion for different shareholders. Foreign and tax-exempt investors, along with the chief executive officer, disproportionately benefit. We show that an inversion simultaneously reduces the wealth of many taxable shareholders. The model illustrates an agency conflict in which heterogeneity in personal taxes generates a wealth transfer between shareholders. Furthermore, personal taxes offset the loss in government revenue by 39%.

Keywords: Corporate governance; Fiduciary duty; Shareholder conflicts; Tax-clientele effects; Mergers and acquisitions

JEL Classification: G32, G34, G38

Suggested Citation

Babkin, Anton and Glover, Brent and Levine, Oliver, Are Corporate Inversions Good for Shareholders? (July 3, 2017). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2700987 or http://dx.doi.org/10.2139/ssrn.2700987

Anton Babkin

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Brent Glover

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Oliver Levine (Contact Author)

University of Wisconsin - Madison ( email )

975 University Avenue
Madison, WI 53706
United States

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