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What Drives Corporate Inversions? International Evidence

54 Pages Posted: 20 Mar 2016 Last revised: 20 Sep 2017

Burcin Col

Pace University-Lubin School of Business

Rose C. Liao

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics

Stefan Zeume

University of Michigan, Stephen M. Ross School of Business

Date Written: September 1, 2017

Abstract

Using hand-collected data on 691 corporate inversions from 11 home countries into 45 host destinations in 1996-2013, we document that corporations invert to destinations with lower tax rates and similar governance standards. Indeed, passage of bilateral double taxation treaties (DTTs), which provide tax incentives for inversions, and bilateral tax information exchange agreements (TIEAs), which improve transparency of tax havens, leads to an increase in corporate inversions. Further, shareholders support tax-driven inversions but shun inversions into weakly governed countries: A 1% point lower tax rate in the host destination (vis-à-vis the home country) is associated with a 0.6% drop in effective tax rates and a 0.4% increase in firm value, respectively. Institutional ownership only increases when firms invert into well-governed tax havens. Our findings suggest that corporate inversions, despite their negative publicity, are typically in shareholders’ interest.

Keywords: Inversions, Tax havens, Tax avoidance, Corporate governance, Cross-border flows

JEL Classification: G34, H26

Suggested Citation

Col, Burcin and Liao, Rose C. and Zeume, Stefan, What Drives Corporate Inversions? International Evidence (September 1, 2017). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 529/2017. Available at SSRN: https://ssrn.com/abstract=2750340 or http://dx.doi.org/10.2139/ssrn.2750340

Burcin Col

Pace University-Lubin School of Business ( email )

One Pace Plaza
New York, NY 100038
United States

Rose Liao (Contact Author)

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics ( email )

1 Washington Park
Newark, NJ 07102
United States

Stefan Zeume

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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