Are Offshore Firms Worth More?

50 Pages Posted: 15 Mar 2012 Last revised: 24 Nov 2017

See all articles by Art Durnev

Art Durnev

University of Iowa - Henry B. Tippie College of Business

TieMei Li

University of Ottawa - School of Management

Michel Magnan

Concordia University - Department of Accountancy

Date Written: November 28, 2015

Abstract

We examine how firms' reliance on Offshore Financial Centers (OFCs), either by registering or setting up subsidiaries in OFCs, affects their financial performance. Using multilevel mixed (fixed and random) effects regressions, we provide evidence that is consistent with the agency costs of tax avoidance. Information asymmetry and lax legal environments in OFCs offset tax benefits, especially for firms directly registered in OFCs. Firms directly registered in OFCs are valued 14% lower than onshore firms, while firms with subsidiaries in OFCs enjoy an 11% higher valuation than onshore firms. However, it appears that investors do not fully appreciate the extent of the agency costs due to increased information asymmetry of firms that set up subsidiaries in OFCs. We argue that the assessment of firm value must encompass the registration status of its subsidiaries rather than the parent company's origin.

Keywords: Offshore Financial Centers, Firm Value, Information Asymmetry, Agency costs

JEL Classification: G15, G34, H26

Suggested Citation

Durnev, Artyom and Li, TieMei and Magnan, Michel, Are Offshore Firms Worth More? (November 28, 2015). Durnev, Li, and Magnan; Journal of Corporate Finance, Vol. 36, 2016. Available at SSRN: https://ssrn.com/abstract=2022244 or http://dx.doi.org/10.2139/ssrn.2022244

Artyom Durnev

University of Iowa - Henry B. Tippie College of Business ( email )

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TieMei Li (Contact Author)

University of Ottawa - School of Management ( email )

136 Jean-Jacques Lussier Street
Ottawa, Ontario K1N 6N5
Canada

Michel Magnan

Concordia University - Department of Accountancy ( email )

Montreal, Quebec H3G 1M8
Canada

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