Multinationals' tax evasion: A financial and governance perspective

Abstract

This paper examines corporate tax evasion from both a financial and governance perspective: one, the impact of tax evasion on a multinational (MNC)'s financial performance and secondly, whether corporate governance levels affect the probability of the multinational committing tax evasion. We specifically address: (i) whether MNCs suffer any adverse short and long-term effects on their financial performance following news that the firm in question has committed, or is suspected of committing, tax evasion and (ii) whether firm and country level governance has any influence on the likelihood of MNCs evading tax. In the short-term, we find that share prices drop in the event window around the announcement date. Further, we find evidence that multinationals do not suffer long-term reputational damage from tax evasion (unless there is repeated media follow-up); leaving no impact on firm profitability or value. We also find that a small number of firm level governance, tax-efficiency based governance and country governance measures have a significant relationship with an MNC's likelihood to commit tax evasion.