Abstract
I study publication of the European Union (EU) tax haven blacklist on December 5, 2017, to examine whether and how the use of recognized tax havens affects firm value. I find that the tax haven naming and shaming by the EU was associated with a negative stock price reaction of firms with tax haven subsidiaries. Overall, publication of the blacklist erased $56 billion in market capitalization among the implicated firms. The largest reaction was for those tax havens, for which it was not foreseeable that they would be included in the blacklist. Retail firms experienced a larger decrease in share price than firms in other industries, which is consistent with a potential consumer backlash. Also more tax-aggressive firms faced more negative returns, which suggests that investors expect firms might be audited or fined for past or overly aggressive tax avoidance. The negative reaction was less pronounced in countries with low levels of investor protection and weakly governed firms with substantial conflicts of interest between principals and shareholders. This is consistent with increased scrutiny and potential for countermeasures associated with the blacklist, which reduce opportunities for managerial wealth diversion.
Highlights
After months of screening of global tax policies, on December 5, 2017, the European Union (EU) finance ministers blacklisted 17 countries for refusing to cooperate with the EU’s decade-long crackdown on tax havens.1 The EU referred to the blacklist as list of non-cooperative tax jurisdictions, since the listed countries failed to make sufficient commitments in response to the EU’s concerns
The results show that the EU was successful at shaming the users of tax havens, which resulted in negative market reaction towards the affected firms
The complex corporate structure arising from subsidiaries in many jurisdictions gives opportunistic managers the opportunity to stockpile negative news until a tipping point. This translates to rational expectations of a decrease in stock price following publication of the EU tax haven blacklist, especially so if the firm has a large proportion of subsidiaries in the blacklisted tax haven countries
Summary
After months of screening of global tax policies, on December 5, 2017, the European Union (EU) finance ministers blacklisted 17 countries for refusing to cooperate with the EU’s decade-long crackdown on tax havens. The EU referred to the blacklist as list of non-cooperative tax jurisdictions, since the listed countries failed to make sufficient commitments in response to the EU’s concerns. The results conform to these expectations and show, for a range of governance variables, a smaller negative effect of the blacklist for weakly governed firms This suggests that the potentially increased auditing, monitoring, scrutiny and transparency following publication of the blacklist reduce some of the expropriation cost associated with having tax haven subsidiaries. The complex corporate structure arising from subsidiaries in many (secrecy) jurisdictions gives opportunistic managers the opportunity to stockpile negative news until a tipping point In my setting, this translates to rational expectations of a decrease in stock price following publication of the EU tax haven blacklist, especially so if the firm has a large proportion of subsidiaries in the blacklisted tax haven countries.
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