Corporate Tax Inversions and Shareholder Value Expectations

Sammanfattning: This paper aims to investigate the expected shareholder value effects of a corporate tax inversion where a U.S. multinational company re-domiciles to a lower tax-rate country via a merger deal, i.e. a merger inversion. Additionally, the study investigates whether differences in firm characteristics can explain variations in expected shareholder value effects. Shareholder value effects were defined as either value creation or value destruction, measured through cumulative abnormal share price returns over a three-day event window surrounding the announcement. First, an event study was performed to quantify the impact the inversion announcement has on the share price of the firm announcing its intention to invert, and compares this reaction against three different control groups. The results suggest that investors have positive expectations of shareholder value following an announcement of a corporate tax inversion conducted via a merger. Statistically significant average cumulative abnormal returns of 8.1% were found following the announcement. Data suggests that the expected shareholder value creation upon announcement is greater for merger inversions than for the control groups. Thereafter, a cross-sectional regression on the abnormal returns was performed. The regression consisted of seven variables which were found to explain approximately 60% of the variation in cumulative abnormal returns following the announcement of a merger inversion. Post-deal target ownership, ownership concentration, board independence, potential tax savings and R&D intensity and being in the healthcare sector were found to be positively correlated with abnormal share price returns, whereas a higher price-to-book ratio corresponded to a lower abnormal share price return.