Multinationals’ Tax Evasion: A Financial and Governance Perspective

Abstract

This paper examines the corporate tax evasion puzzle from both a financial and governance perspective: one, the impact of tax evasion on a multinational's financial performance and secondly, whether corporate governance levels affect the probability of the multinational committing tax evasion. We specifically address: (i) whether multinationals (MNCs) suffer any adverse short and long-term effects on their financial performance following news that the firm in question has committed, or is suspected of committing, tax evasion and (ii) whether country and corporate level governance has any influence on the likelihood of MNC’s evading tax. In the short-term, we find that share prices drop in the event window around the announcement date. However, we find no evidence that multinationals suffer long-term reputational damage from tax evasion; leaving no impact on firm profitability or value. We also find that country governance levels do not have any significant relationship with the MNC’s likelihood to commit tax evasion nor we find corporate level governance has any consistent prediction power.

Keywords: Tax evasion, multinational corporations, performance, corporate governance, country level governance.

JEL Classification: F3 and G1