Agency Costs of Moving to Tax Havens: Evidence from Cross‐Border Merger Premia

18 Pages Posted: 7 Jul 2017

See all articles by Burcin Col

Burcin Col

Pace University-Lubin School of Business

Date Written: July 2017

Abstract

Manuscript Type. Empirical.

Research Question/Issue. This paper explores the valuation effects of the tradeoff between tax avoidance and corporate governance through tax haven M&As. Firms can achieve tax savings by selling to an acquirer based in a tax haven, making the newly created multinational a haven resident. Changing a firm's tax home through a 100 percent acquisition is also accompanied by a change in legal system and corporate governance. Therefore, tax savings could come at the expense of corporate governance degradation making the value implications of such tax avoidance attempts an important empirical issue.

Research Findings/Insights. Using an international sample of cross‐border M&As from 1989 to 2012, we find value evidence supporting the agency costs hypothesis. For 100 percent M&As, a lower target premium is associated with those transactions where the tax haven acquirer has weaker investor protection than the target.

Theoretical/Academic Implications. Our findings provide value evidence regarding the agency costs of tax‐motivated M&As as a result of the secrecy laws and limited investor protection of tax havens.

Practitioner/Policy Implications. This study provides a perspective for executives of multinational firms to take into account the value consequences associated with secrecy laws and weak investor protection while considering a possible relocation to tax havens. It also offers further insight to policymakers concerning the costs of limited investor protection and lack of transparency.

Keywords: Corporate Governance, Tax Haven, Cross‐Border Mergers, Tax Avoidance

Suggested Citation

Col, Burcin, Agency Costs of Moving to Tax Havens: Evidence from Cross‐Border Merger Premia (July 2017). Corporate Governance: An International Review, Vol. 25, Issue 4, pp. 271-288, 2017, Available at SSRN: https://ssrn.com/abstract=2998381 or http://dx.doi.org/10.1111/corg.12177

Burcin Col (Contact Author)

Pace University-Lubin School of Business ( email )

One Pace Plaza
New York, NY 100038
United States

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