Stockholder Wealth Effects of Corporate Inversions:  Is It just Tax or Does Governance Matter too?

Abstract:

This study investigates the effects of governance on stockholder wealth effects when a firm announces its intention to invert.  Using a sample of 59 inversions during the period 1994 to 2014, we find that irrespective of the type of inversion and other firm characteristics, stockholders gain when the new country of incorporation has stronger country-level governance.  Gains also vary significantly with the nature of the inversion: firms which invert purely for tax-related reasons without any intention to merge with another firm experience negative stockholder wealth effects.  In addition to the cross-sectional tests, this study also uses Mylan’s inversion and subsequent events as an example to show that stockholders are indeed affected by whether or not a firm reincorporates in a jurisdiction with weaker stockholder rights protection.  Such weaker protection insulated Mylan’s management from removal and cost shareholders significantly by allowing it to successfully reject a takeover attempt by Teva. Therefore, stockholders would need to evaluate the benefits from inversion in the form of tax savings against the potential costs arising from weaker corporate governance.

Keywords:

Corporate inversions; Taxes; Corporate governance; Corporate restructuring

JEL Classification:

G30, G32, G34

Citation as:  

Kolay, M. (2018). "Stockholder Wealth Effects of Corporate Inversions:  Is It just Tax or Does Governance Matter too?", Review of Economics & Finance, 14(4): 83-97.