Firm Valuation Effects of the Expatriation of U.S. Corporations to Tax Haven Countries

35 Pages Posted: 31 Oct 2002

See all articles by C. Bryan Cloyd

C. Bryan Cloyd

Virginia Polytechnic Institute & State University - Department of Accounting and Information Systems

Lillian F. Mills

University of Texas at Austin - McCombs School of Business

Connie D. Weaver

Texas A&M University - Department of Accounting

Date Written: October 16, 2002

Abstract

As a direct response to the recent trend in corporate expatriations, politicians have questioned the patriotism of firms that reorganize outside the U.S. and introduced numerous legislative proposals designed to prevent corporate expatriations. The implicit assumption made in proposing this legislation is that the expatriation trend is just beginning and that many more firms will follow suit to reduce their U.S. tax burdens. In this study, we investigate whether the share prices of expatriating firms react positively to initial announcements of intentions to expatriate to tax haven countries.

Overall, we do not detect obvious shareholder benefits from expatriations. We analyze the statistical significance of each firm's abnormal returns around the inversion announcement date using approximate randomization procedures. Specifically, we find that seven of the 19 single-company expatriations have significant negative announcement period returns and only two show significant positive returns. The remaining ten inversions show no statistically significant market reaction. The average return in the announcement period across all 19 firms is negative, but not significantly different than zero. Further, there is no consistent evidence of positive post-announcement returns.

One policy implication of these results is that existing costs of expatriating might be sufficient to dissuade future expatriation without additional tax rule restrictions. At the very least, the track record of prior expatriations in failing to create substantial shareholder value might buy Congress some time to thoughtfully consider any legislative action that might be necessary. Because alternative avenues exist for firms to avoid, or at least substantially defer, U.S. tax on foreign income, a more comprehensive review of U.S. tax rules governing the taxation of foreign income may be needed.

Keywords: corporate expatriation, inversion, tax haven, merger

JEL Classification: H87, H25, F23, G34, G12, M41

Suggested Citation

Cloyd, C. Bryan and Mills, Lillian F. and Weaver, Connie D., Firm Valuation Effects of the Expatriation of U.S. Corporations to Tax Haven Countries (October 16, 2002). Available at SSRN: https://ssrn.com/abstract=341141 or http://dx.doi.org/10.2139/ssrn.341141

C. Bryan Cloyd

Virginia Polytechnic Institute & State University - Department of Accounting and Information Systems ( email )

Pamplin College of Business
Blacksburg, VA 24061
United States
217-333-4592 (Phone)

Lillian F. Mills (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Connie D. Weaver

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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