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

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.