Are Corporate Inversions Good for Shareholders?
59 Pages Posted: 10 Dec 2015 Last revised: 12 Aug 2017
Date Written: July 3, 2017
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: Suggested Citation