Abstract

Using a large sample of multinational companies that establish affiliates or subsidiaries in offshore financial centers (OFC) but are headquartered in 29 non-OFC countries, we find that OFC operations tend to increase stock price crash risk at the firm level, and that firms operating in OFCs with more profound OFC characteristics have higher crash risk. Moreover, we show that low corporate tax rates and stringent secrecy policies, which are two distinguishing aspects of OFCs, are likely to be the key drivers that increase stock price crash risk. Finally, we find that more conservative accounting information and stronger external monitoring such as analyst coverage and investor protection attenuate the positive relation between OFC operations and crash risk. Our results are robust to a variety of sensitivity checks. JEL Classification: G15, H26, M41, F36

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