Income-shifting arrangements of US multinational corporations and future stock price crash risk

Abstract

PurposeThis study examines the importance of income income-shifting arrangements of US multinational corporations (MNCs) on future stock price crash risk.Design/methodology/approachThis study employs a sample of 7,641 corporation-year observations over the 2005–2017 period and uses ordinary least squares regression analysis.FindingsThe authors find that the income-shifting arrangements of MNCs are positively and significantly associated with stock price crash risk after controlling for corporate tax avoidance and other known determinants of stock price crash risk in the regression model. This result is robust to alternative measures of stock price crash risk and income-shifting, and several endogeneity tests. The authors also observe that income-shifting arrangements increase stock price crash risk both directly and indirectly through the information opacity channel. Finally, in cross-sectional analyses, the authors find that the positive association between income-shifting and stock price crash risk is more pronounced for MNCs that use tax haven subsidiaries and have weak corporate governance mechanisms.Originality/valueThe authors provide new empirical evidence that MNCs will likely face significant capital market consequences regarding their income-shifting arrangements.