Tax Haven Incorporation and the Cost of Capital

61 Pages Posted: 17 Feb 2021

See all articles by Christina Lewellen

Christina Lewellen

North Carolina State University - Department of Accounting

Landon M. Mauler

Florida State University - Department of Accounting

Luke Watson

Villanova University

Date Written: August 1, 2020

Abstract

While incorporating the firm’s parent company in a tax haven offers tax savings, it also imposes risks. We predict and find a higher cost of equity capital in firms with parent companies that are incorporated in tax havens. We find that the observed cost of equity premium is enhanced by tax risk, firm-level information risk, and country-level legal risk. We also employ corporate inversions in a difference-in-differences test and again find a positive relation between tax haven parent incorporation and the cost of capital. Our study contributes to the literatures on valuation of tax haven use, tax and nontax costs of corporate strategies, corporate inversions, and the relation between taxes and the cost of capital.

Keywords: tax avoidance, tax havens, corporate inversions, cost of equity

JEL Classification: G32, H26, M41

Suggested Citation

Lewellen, Christina and Mauler, Landon M. and Watson, Luke, Tax Haven Incorporation and the Cost of Capital (August 1, 2020). Available at SSRN: https://ssrn.com/abstract=3756367 or http://dx.doi.org/10.2139/ssrn.3756367

Christina Lewellen (Contact Author)

North Carolina State University - Department of Accounting ( email )

Raleigh, NC 27695-8113
United States

Landon M. Mauler

Florida State University - Department of Accounting ( email )

Tallahasse, FL 32306
United States

Luke Watson

Villanova University ( email )

United States

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