The Effect of Inversions on Corporate Governance

52 Pages Posted: 17 Aug 2014 Last revised: 26 Oct 2016

See all articles by Felipe Cortes

Felipe Cortes

D'Amore-McKim School of Business-Northeastern University

Armando R. Gomes

Washington University in Saint Louis - John M. Olin Business School

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School

Date Written: October 25, 2016

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

Suggested Citation

Cortes, Felipe and Gomes, Armando R. and Gopalan, Radhakrishnan, The Effect of Inversions on Corporate Governance (October 25, 2016). Available at SSRN: https://ssrn.com/abstract=2481345 or http://dx.doi.org/10.2139/ssrn.2481345

Felipe Cortes

D'Amore-McKim School of Business-Northeastern University ( email )

360 Huntington Ave
419F Hayden Hall
Boston, MA 02140
United States

Armando R. Gomes

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
3145607087 (Phone)

Radhakrishnan Gopalan (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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