Saturday, April 11, 2015

Corporate Tax Havens and Shareholder Value

Read the working paper
INSEAD Working Paper 2015/30/EPS

Using a novel hand-collected dataset of 17,331 publicly listed firms from 52 countries and their international subsidiaries, we investigate the motives for establishing subsidiaries in tax havens. We document five sets of results. First, a 1 percentage point reduction in firms’ home-country corporate tax rate is associated with a 1.2 percent increase in value of firms without tax haven subsidiary while firms with tax haven subsidiary are unaffected. Second, the signing of Tax Information Exchange Agreements (TIEAs) increases average shareholder value by 2.5 percent. Third, the positive effect is stronger for firms with more complex firm structure within the tax haven. Fourth, firms respond to TIEAs by engaging in haven hopping, i.e. moving their subsidiaries from tax havens that entered TIEAs to tax havens that did not. Fifth, TIEAs do not increase average shareholder value of firms that engage in haven hopping. These results suggest that tax haven subsidiaries are used for entrenchment activities beyond pure tax saving.