Do tax havens create firm value?

Abstract

International audienceOn October 11, 2011, a non-governmental organization called ActionAid published a report condemning the FTSE 100 firms for holding an unusually large number of subsidiaries in tax havens. Urging the government to implement appropriate actions, the report raised the firms' costs of holding tax haven subsidiaries. After this event, the stock prices of the nonfinancial firms experienced a 0.9% abnormal drop (corresponding to about £ 9 billion in market capitalization). Those better-governed firms and those with larger shares of subsidiaries in tax havens experienced larger drops. We find some evidence that government scrutiny, reputation, and investor sentiment were plausible channels of such a negative impact

Public Pressure and Corporate Tax Behavior

“…On October 11, 2011, ActionAid released a report titled “Addicted to Tax Havens,” which received widespread attention and was the subject of general interest, many popular press articles, and parliamentary discussion. Choy, Lai, and Ng [] document significant negative returns for FTSE 100 firms on this date, consistent with market participants anticipating negative consequences from the unwanted publicity. We examine whether the negative returns for FTSE 100 firms around the October 11, 2011 event date are especially concentrated in firms that did not disclose their full subsidiary list in 2006.…”

“…Including all U.K. firms in the regression implies that the intercept term captures the market return for FTSE 100 firms that were initially compliant as well as all other The dependent variable is the Three-Day Buy-and-Hold Return Centered on ActionAid Report Date, October 11, 2011. This report is the focus of Choy, Lai, and Ng [2014]. Incomplete Subs List is an indicator variable equal to one for FTSE 100 firms that did not disclose the full list of their subsidiaries prior to the 2010 public pressure related to subsidiary disclosure and equal to zero, otherwise.…”

“…Over 500 tweets reference #taxpaysfor (see https://twitter.com/ search?f=realtime&q=%23taxpaysfor&src=typd). 6 ActionAid's 2011 report titled "Addicted to Tax Havens" garnered significant media coverage, resulting in members of the U.K. Parliament sponsoring and signing two early day motions to press U.K. government officials to confront tax haven use, as well as resulting in abnormal market returns for firms targeted in the report (Choy, Lai, and Ng [2014]). The report is available at http://www.actionaid.org/sites/files/actionaid/addicted to tax havens.pdf.…”

Corporate governance and returns to emerging economy firm acquisitions in tax havens: An empirical test on Indian firms

“…Tax havens can help firms lower their corporate taxes by enabling them to book a greater share of profits in these havens through mechanisms such as transfer pricing, intra firm loans, and royalty payments (Gravelle, ). This opportunity to substantially lower taxes by using tax havens, as suggested by economic theory, would mean a positive stockholder return to the use of tax havens (Choy, Lai, & Ng, , ). The secrecy afforded by tax havens on the other hand can encourage those in control of the firm, that is, managers and controlling stockholders, to act opportunistically against the interests of other stockholders and thereby lower stockholder returns.…”

“…The limited empirical evidence to date in the literature suggests the use of tax havens by advanced economy firms yield positive stockholder returns, and these returns are greater for firms with better firm‐level corporate governance. For example, based on a sample of UK firms, specifically the FTSE 100 firms, Choy et al (, ) found the average firm in their sample had a stockholder value gain of at least 0.9% associated with their tax haven use and such stockholder gains were greater for firms with better firm‐level corporate governance.…”