corporate tax inversions and reputational costs
TRANSCRIPT
☆ We thank Håkan Jankensgård, our supervisor, for
providing insightful comments. We would also like to thank
Bengt EW Nilsson for fruitful discussions and Daniel Tano
for proofreading and revising. Finally, we would like to
thank Department of Economics and Management.
a* Lund University, MSc in Finance Graduate,
[email protected], 881124-4071
b* Lund University, MSc in Finance Graduate,
[email protected], 890125-4832
INFO ABSTRACT
Corporate inversion is the procedure of reincorporating abroad for tax purposes
to reduce the corporate income tax. The purpose of this paper is two-fold. First,
we evaluate the shareholder value creation aspect of U.S. corporate inversions
after 2004, a year when the U.S. imposed a number of regulatory changes to
reduce the benefits of tax inversions. Second, we examine a number of board-
related determinants of the decision to invert, with particular focus on board-
level patriotism and firm ethics. By using traditional event study methodology
we show that inversions create significant shareholder value. We also find that
the ratio of foreign professionals on U.S. corporate boards positively affect the
decision to invert. By assuming a positive relationship between patriotism and
the level of board reputational costs, we introduce the notion that lack of board-
level patriotism may partly explain the under sheltering problem related to tax
inversions.
Corporate Tax Inversions and Reputational Costs ☆
- A Study on Board-Level Patriotism and the Decision
to Expatriate
Alexander Gjörup a*
Gustav Nilssonb*
School of Economics and Management, Lund University, Sweden
25 May 2016
Available Online:
19 June 2016
Keywords:
Tax Avoidance
Tax Inversion
Board Nationality
Reputational Costs
Under Sheltering Puzzle
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Table of Content
I. Introduction 4
II. Regulatory Background 7
III. Theory and Hypotheses Development 10
3.1 Empirical findings on M&As 10
3.2 Empirical findings on tax inversions 10
3.3 Firm-specific determinants of tax inverting firm 13
3.4 Board-related determinants of tax inverting firms 15
3.5 Summary of hypotheses 20
IV. Methodology 21
4.1 Data collection 21
4.2 Event study 24
4.3 Modeling the market reaction of inversion 27
4.4 Modeling the decision to invert 28
V. Empirical Results 29
5.1 Market reaction to inversion 29
5.2 Further evidence on the market reactions to tax
inversions
33
5.3 Empirical analysis of the decision to invert 38
VI. Conclusion 43
VII. Reference List 45
VIII. Appendix 49
A1 Data description 49
A2 Inversion sample 50
A3 Peer group sample 50
A4 OLS specification 51
A5 Logit regression 51
A6 Variables 52
A7 Model validity 55
A8 Abnormal return: descriptive statistics 56
A9 Robustness tests 58
A10 Description of our novel variable (Board nationality) 59
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- Learned Hand, 1934 -
“Any one may so arrange his affairs that his taxes shall be as low as possible; he is not
bound to choose that pattern which will best pay the treasury; there is not even a patriotic
duty to increase one’s taxes1”.
I. Introduction
Fueled by political tension and heavy media coverage, researchers are becoming
increasingly interested in contributing to the public debate of corporate tax inversions - the
procedure by which a firm re-domiciles abroad as a way to avoid U.S. taxes, which are
amongst the highest in the world (Pomerleau, 2015). However, despite increased attention
from the public, corporations and policy makers cannot agree on a path where both end up
satisfied. The U.S. Congress and Treasury Department have referred to the act of inversion as
being ―unpatriotic‖ and President Barack Obama recently called inversions ―unpatriotic tax
loopholes‖ (Bloomberg, Z.M., 2014). Further, a recent transaction that has been the highlight
of attention in media is the large pharmaceutical firm Pfizer and its merger with the Irish
pharmaceutical firm Allergan in a staggering $160 billion deal, which would make it the
biggest transaction in the drug industry ever2.
1 Billings Learned Hand was an American judge who lived between 1872 – 1961 and is remembered for his
contributions to the legal literature. 2 The deal was withdrawn on April 6
th 2016 as the U.S. Treasury Department added additional restrictions to
inverting transactions; https://www.theguardian.com/business/2016/apr/05/pfizer-allergan-merger-tax-
avoidance-rules.
5
In this paper, we create a unique data set of all inversions3 from 2004 until 2016, both
announced and completed. By only studying transactions after 2004, we capture the most
relevant and homogenous set of transactions, as transactions before and after that year differ
fundamentally due to regulatory changes4. In this thesis, using an event study methodology,
we examine if tax inversions after the 2004 legislation changes create shareholder value by
measuring abnormal returns. Further, we explore a number of board-related determinants of
inverting firms to investigate whether potential lacks of patriotism and firm-level unethical
behavior have an impact on firms‘ propensity to invert.
Our interest has its foundation in the current debate regarding tax inversions where
political leaders, with President Obama in the front seat, call U.S. inverting firms
―unpatriotic‖ (Bloomberg, Z.M, 2014) while continuously trying to strengthen anti-inversion
rules (Hwang, 2016). While a few legal scholars have attempted to connect unpatriotic
corporate behavior and its effect on corporate decision making as it relates to tax inversions
(Yosifon, 2015), there is no, to our knowledge, material empirical research conducted in this
field. Hence, our objective is to explore empirically whether corporate leaders engaging in tax
inversions in fact are more unpatriotic and unethical than are other U.S. corporate leaders. In
determining whether corporate leaders are unpatriotic, we study the nationality of the board
members. The fundamental question we ask ourselves is whether U.S. corporations, in order
to stay competitive on the global scene (Mann, 2013; Yosifon, 2015), forego its patriotic
obligations in order to create shareholder value. Our second variable of interest is meant to
capture the ―ethical‖ aspect of corporate decision making, which by political leaders is said to
be another feature of inverting firms (New York Times, M.M, 2016). To capture this effect,
we study firms‘ engagement in Corporate Social Responsibility (CSR) related activities, with
the hypothesized connection that less engagement in CSR should increase firms‘ propensity to
invert. We also study the existence of staggered boards to investigate if entrenchment is
related to firms‘ propensity to invert. Insider ownership is also analyzed with the underlying
hypothesis that increased insider ownership should increase managers‘ focus on the firm‘s
financial performance, in line with traditional agency theory5. Lastly, we study the impact of
institutional ownership on corporate boards‘ decision making as it relates to inversions.
This study presents a number of important findings. We find that corporate tax inversions
do add significant shareholder value measured as abnormal returns on the day of
3 Section IV (Methodology; Data collection).
4 Section II (Regulatory background).
5 In line with traditional agency theory where higher management equity aligns interest between managers and
shareholders (Jensen, 1976).
6
announcement and throughout the event windows. On average, based on our sample of 26
inverting firms we find that U.S. tax inversions outperform their peers by approximately
4.81% on the day of announcement6. We also find significant and highly positive returns for
all event windows. Further, we report novel empirical evidence that U.S. corporate boards
with high degree of foreign board members are more likely to engage in corporate tax
inversions, which is consistent with the notion brought up in recent legal literature that
corporate patriotism is related to firms‘ propensity to engage in corporate tax inversions
(Yosifon, 2015). We also find a significant and negative relationship between insider
ownership and firms‘ propensity to invert, which contradicts traditional agency theory that
increased managerial equity should align manager and shareholder interests to pursue tax
avoidance activities. Lastly, we do not find any statistical evidence that neither entrenchment,
CSR nor institutional ownership have an impact on firms‘ decision to invert.
This paper contributes to the limited but developing literature on corporate tax inversions.
First, our research adds to the current literature (e.g. Desai & Hines, 2002; Cloyd, Mills, &
Weaver, 2003; Babkin, Glover, & Levine, 2015) within the field of stock price performance
and firm value creation as a result of tax inversions. We contribute to the current literature by,
in contrast to previous research, only study post-2004 transactions. Further, and most
importantly, we contribute to the limited literature on firm determinants of tax inverting firms,
especially by providing evidence that increased number of foreigners on U.S. corporate
boards increase firms‘ propensity to invert. Hence, our findings shed new light on the impact
of board member nationality and patriotism on corporates‘ propensity to invert. Lastly, by
connecting our findings with the concept of reputational costs discussed by Weisbach (2001),
we introduce the idea that firm-level patriotism potentially could contribute in solving parts of
the under-sheltering puzzle.
This paper is structured as follows. Section two, Theory and Hypothesis Development,
starts by summarizing the regulatory background of corporate tax inversions, which is key to
understanding why there has been such a lively debate in recent years. This is followed by a
brief summary of previous literature related to Mergers & Acquisitions (hereon M&A).
Section two concludes by summarizing prior research as it relates to tax inversions. Section
three lays out the methodology used in this paper and section four presents our findings. We
conclude by summarizing our results by relating our findings to previous research as well
bringing up suggestions for future research within this area.
6 The inversion sample gained 4.74% on the day of announcement whereas the peer group returned -0,07%.
7
II. Regulatory Background
As a starting point to this paper we walk through, from a regulatory perspective, the most
central aspects of tax inversions and the U.S. tax system, which is the fundamental issue
underlying the ongoing debate. This is followed by an overview of previous generations of tax
inversions and how they have changed as a result of alternations to the regulatory
environment. Interestingly, despite increased debate during the past 25 years (Hwang 2016),
U.S. policy makers continue to fail in finding a solution that benefits all stakeholders in the
society.
U.S. tax regulation
The U.S. tax system has been in the center of the public debate due its fundamental
structure where U.S. firms with significant international presence attain a competitive
disadvantage compared to international competitors (Yosifon, 2015). In essence, the reason
for this is two-fold. First, the U.S. has one of the highest corporate tax rates in the world –
U.S. corporations pay 40% in corporate tax, which is an approximated average based on the
statutory tax rate of 35% in addition to the 0-12% state and local tax rate7. Such rates are
significantly higher than many other western countries to which U.S. companies often invert,
including Ireland (12.5%), Canada (26.5%) and the Netherlands (25%)8. Second, The U.S.
treats individual and corporate income earned abroad differently than other countries do, i.e.
through worldwide taxation compared to territorial taxation9 (Marples & Gravelle, 2014).
This means that U.S firms need to pay US taxes on income earned abroad.
Overview of regulatory changes
In an insightful article regarding the evolution of tax inversions, Hwang (2016) explores a
number of regulatory milestones, all defined by its current regulatory environment. In all
stages, public policy makers have gradually tried to increase the cost of tax inversions to
lower the incentive for U.S. firms to engage in such activities (Hwang, 2016). The first
7 Note KPMG, Corporate Tax Rate Table, 2015
8 Note KPMG, Corporate Tax Rate Table, 2015
9 Worldwide taxation versus territorial taxation refers to a country‘s way of taxing its citizens and corporations,
where worldwide taxation means that citizens are taxed by its home country no matter where in the world the
income is earned, whereas territorial taxation means that citizens and corporations are only taxed by the local
government in which the income is earned. As an example, if a U.S. firm makes $100 in one year where 100% is
earned in Ireland (12.5% tax rate) and 0% is earned in the U.S. (40% tax rate), the U.S. firm would be subject to
pay $12.5 in income tax to the Irish government and $27.5 ((0.40-0.125)*100) to the U.S. government.
8
generation of tax inversions started in early 1980‘s as McDermott International decided to
invert to Panama (Bloomberg, Z.M, 2014), one of many tax heaven countries. Through a deal
where one of its Panama-based subsidiaries bought the majority of the parent company‘s
stock, the subsidiary became the new parent, leading to a significantly lower tax bill.
Additionally, the company could now retain and reinvest cash earned in foreign countries
without being penalized (i.e. taxed) for bringing earnings back to the U.S. first (Bloomberg,
Z.M, 2014). As a response to similar transactions that became increasingly popular after the
McDermott transaction, Section 1248(i) was implemented by the U.S. Treasury department as
a way to tax such transactions differently (Hwang, 2016). Many loopholes remained,
however, and corporations continued to find ways to expatriate.
With the American Jobs Act implemented in 2004, including section 7874 (Law Cornell,
2004-1; Hwang, 2016), the U.S. government implemented another measure to further limit the
benefits of corporate inversions. The new piece of regulation substantially lowered the
number of tax inversions to tax heavens (Hwang, 2016), as inverting U.S. firms‘ shareholders
were now not allowed to own more than 80% of the new corporation. In addition, the
inverting company was required to have significant part10
of its operations in the country in
which it was incorporated (Hwang, 2016). This made it significantly less attractive to move
firm domicile (i.e. through pure re-incorporation) to tax heaven countries like Panama,
Cayman Island and Bermuda11
. As a way around the new regulation, companies started to
investigate other countries with lower tax rates in which they did have significant part of their
businesses. Consequently, firms began to acquire and merge with companies in lower tax
countries, such as Ireland, Canada, and Netherlands.
10
The 25% rule, as summarized by Hwang (2016), refers to the ―substantial business activities test‖ where a
company to be eligible for a tax inversions needed to have at least 25% of its employees and employee
compensation in the new foreign country, 25% of its assets in the new foreign as well as having 25% of total
income earned in the new country. 11
Example of firms inverting to tax heavens pre-2004 include: Nabors Industries (2002), Noble Corporation
(2002), Cooper Industries (2002), PXRE Group (1999), Tyco International (1997) etc.
http://www.bloomberg.com/infographics/2014-09-18/tax-runaways-tracking-inversions.html
9
An additional effort by the U.S. Treasury department, in collaboration with the Internal
Revenue Services (IRS), to further reduce the benefits of corporate inversions was in place in
2014 through the Notice 2014-5212
(Hwang, 2016). By attacking both the actual transaction as
well as post-merger aspects of business combinations, the intention was to further increase the
cost of tax inversions. However, despite new directives, companies continued to engage in
inversions as the two central objectives of such transactions remained; namely to reduce
overall firm-wide effective tax rate as well as being able to access cash that had been trapped
abroad. As it seems, and despite the number of efforts of the U.S. government and the IRS to
discourage tax inversions, corporations continued to find ways to invert.
III. Theory and Hypotheses Development
3.1 Empirical findings on M&A
The effect on firm value as a consequence of M&A13
activity is a widely researched area
within the field of finance, where several theories have attempted to explain the motives14
behind such transactions. The consensus regarding earlier M&A studies focusing on value
12
PwC report, October 2004, ―Notice 2014-52 imposes a range of restrictions on ―inversion‘ transactions‖ 13
Mergers and Acquisitions is a collective term used for the consolidation of companies or assets. There are
several different ways M&A transactions can be conducted, yet the two most common ways are often referred to
as mergers and business consolidations. Mergers are such transactions where the acquirer takes on all assets and
liabilities of the acquired company, that is, A + B is equal to A, where A is the acquirer and B is acquired firm
(Gaughan, 2010). Business consolidation, on the other hand, are such transactions where A + B is equal to C
(Gaughan, 2010). That is, two companies are combined into a completely new entity (Gaughan, 2010). In our
study, merger is the primary form of transaction. 14
E.g. The Synergy hypothesis (Seth, Song & Petit, 2000) , The Best owner principle hypothesis (Manne, 1965),
The Hubris hypothesis (Roll, 1986) and The Agency hypothesis (Berkovitch & Narayanan, 1993)
8
7
6
5
4
3
2
1
04* 05 06 07 08 09 10 11 12 13 14** 15
Source: Data Compiled by Bloomberg
* American Jobs Act regulation
** Notice 2014-52 regulation
We present the total number (34) of tax inversions post-2004. Previous to 2004, Bloomberg reports 20
completed inversions. The figure includes all transactions (M&A, Spin-off/split-off, re-incorporation).
Figure 1
The Development of Inversions Post-2004
10
creation is that, on average, the acquired firm‘s shareholders tend to earn a positive abnormal
return, while the acquiring firm‘s shareholders earn a slightly negative return. Huston &
Ryneqaert (1994), for instance, show that by examining bank deals between 1985 and 1991,
the total combined share value increase is slightly positive, yet not significant. They find that
positive firm value effects on targets are offset by negative returns for acquirers. Hudgins &
Seifert (1996) find similar results when studying the wealth effect of shareholders as a results
of international M&A transactions. They find that U.S. acquirers experience insignificant
abnormal returns on the day of announcement. Lastly, in a study focused on pharmaceutical
companies, Ravenscraft & Long (2000), find evidence that for 65 mergers between 1985-
1996 the combined abnormal market reaction on the day of announcement was slightly
positive, 0.59%, the return for the acquirer was -2.12% and the return for the target was
13.31%. Hence, and as summarized by Haleblian, Devers, McNamara, Carpenter & Davison
(2009), most earlier studies on the topic of M&A transactions and value creation are
consistent that M&A do not increase shareholder value, particularly when measuring the
value effect of the acquiring firm (Haleblian, Devers, McNamara, Carpenter & Davison,
2009). Although more recent studies tend to focus more heavily on determinants and motives
of M&A transactions, the view that M&As on an aggregate level, for acquirers, result in no
value creation remains (Haleblian, Devers, McNamara, Carpenter & Davison, 2009).
3.2 Empirical findings on tax inversions
In this section we leave the extensive literature regarding pure M&A transactions and
move forward to assess previous literature regarding tax inversions and their impact on firm
value and shareholder returns along with a breakdown of the benefits and potential costs
associated with such transactions.
Despite the relatively clear and intuitive value enhancing aspect of tax inversions, that is,
lower effective tax rates leading to reductions in tax payments and increased profitability,
earlier literature remains indecisive whether these transactions actually do add value for
shareholders (Desai & Hines, 2002; Cloyd, Mills & Weaver, 2003; Seida & Wempe, 2002).
Desai & Hines (2002), for instance, when evaluating 19 inversion transactions between 1993
and 2002, find little evidence that tax inversions are value adding. Similarly, Cloyd, Mills &
Weaver (2003) find that the average abnormal return for their sample of tax inversions is
negative, yet not significantly different from zero. Seida and Wempe (2002), on the other
hand, do find a positive value creation effect of tax inversions that are approved by the firm‘s
shareholder, while transactions approved by board of directors yield insignificant results. In a
11
more recent study, however, Babkin, Glover & Levine (2015) find positive abnormal returns
for their sample of inverting firms, yet they find that returns of private individuals vary widely
depending on type of investor. Compared to earlier studies only including transactions pre-
2004, Babkin, Glover & Levine (2015) include post-2004 transactions when creating their
sample of 60 inversions between 1993 and 2015.
Further, more qualitative studies have also been conducted, such as Desai and Hines
(2002) analysis on Stanley Works15
and its potential gains from the time proposed and very
well-debated tax inversion. In their analysis they compare the positive stock market reaction
on the day of announcement, i.e. the change in market value, with the potential increase in
cash flows generated from lower tax rates and found that the market overvalued the positive
effects of the inversion. Although the article finds little evidence on actual value creation as a
result of the transaction, it does provide a framework how to analyze potential tax savings
related to tax inversions.
The costs and benefits of tax inversions
As summarized by a number of researchers (Desai & Hines, 2002; Gunn and Lys, 2015;
Hwang, 2016), there are a few major benefits to be realized from a tax inversion transaction
that are not present to the same degree as in a regular cross-border M&A transaction. First,
and most obvious, firms invert to countries with significantly lower corporate tax rates in
order to lower the overall firm-wide effective tax rate. The downside of this is that as tax rates
decrease, so do also the benefits of tax shields; that is, theoretically16
, a firm facing lower tax
rates is more likely to take on less debt. Second, another central benefit of tax inversions is a
firm‘s ability strip earnings which means that U.S. firms incorporated abroad are able to
transfer U.S. earned income to lower tax countries. One typical way of doing this is through
intercompany debt, where the foreign parent company lends capital to the U.S. domiciled
subsidiary. Then, since interest is tax deductible, the U.S. subsidiary pays interest to the
foreign domiciled parent company, whereby the company ends up not paying taxes on all its
earnings earned in the U.S. (Hufbauer & Assa, 2003). Lastly, as laid out by Hwang (2016),
another major benefit of tax inversions is that firms are able to access cash earned in foreign
countries that previously had been trapped abroad. In other words, by inverting to a lower tax
jurisdiction, companies are no longer forced to repatriate income from abroad back to the U.S.
15
Stanley Works, today known as Stanley Black & Decker, Inc., is an American manufacturer of industrial and
household products that announced an inversion to Bermuda in 2002. 16 As observed by Miller and Modigliani (1963)
12
This means that firms can pay a lower local tax rate in the new country of domicile, get access
to its earnings and use it for a productive purpose (Hwang, 2016).
On the other hand, there are a number of tax and non-tax related costs associated with tax
inversions that are important to understand when evaluating the total net benefit of such
transactions. Gunn & Lys (2015) summarize the most critical costs. First, the company cannot
make use of tax credits and net operating losses when transferring corporate assets to the new
domicile (Law Cornell, 2004-1). Second, shareholders of the inverting company is subject to
pay capital gains taxes as a result of the inversion transaction (Law Cornell, 2004-2) (Gunn &
Lys, 2015; Babkin, Glover & Levine, 2015) as are managers and board members to any
additional compensation that is tied to the inversion (Law Cornell, 2004-3). Third, inverting
firms are also subject to non-tax costs such as those generated from changes in corporate
governance laws (Gunn & Lys, 2015). As an example, the Netherlands has obliged
shareholder votes when deciding executive pay (Chasan, 2013).
Fourth, and lastly, corporate inversions tend to bear negative publicity and political costs,
which by many are seen as the main costs to tax inversions (Gunn & Lys, 2015). Similar
lines of reasoning are highlighted by Godar, O‘connor, & Taylor (2005) who state that
―Politicians in the U.S. are labeling inversions […] ‗unpatriotic‘ and ‗immoral‘ so that
business executives might be worried about their personal and brand reputation prior to an
inversion‖. Graham, Hanlon & Shevlin (2012) are able to draw related conclusions after
having surveyed a group of U.S. executives. They find that more than half of the surveyed
executives agree that damage to firm reputation is an important factor when deciding to
invert. Although finding no clear empirical evidence, Gallemore, Maydew & Thomock (2013)
argue that it is possible that only firms that are immune to reputational cost engage in
aggressive tax sheltering. In a similar vein, empirical evidence from U.S. firms show that the
possible costs of tax planning act as a direct constraint on the incentive to invert, especially
costs of bad publicity and political costs (Wahab & Holland, 2012). This might help to
explain the “Under-sheltering Puzzle” as discussed by Weisbach (2001) who proposes that
despite the fact that tax sheltering of different sorts should create shareholder value due to
smaller tax bills, many firms decide not to engage in such activities due to e.g. high
reputational costs. Similar discussions are brought to attention by Kanagaretnam, Lee, Lim, &
Lobo (2016), Bankman (2004), Gallemore, Maydew, Thomock (2013), and Shulman (2009).
Shulman (2009), for instance, articulated in a speech that aggressive tax avoidance imposes a
―significant risk to corporate reputations‖ and that ―the general public has little tolerance for
overly aggressive tax planning‖.
13
This leads us to our first hypothesis; as prior research has shown that ―ordinary‖ M&A
activity does not create any significant value for the acquiring firm, we hypothesize that
adding the extra benefit of potential tax savings that come with inversions should increase
shareholder value. In other words, we wonder if the benefits generated from tax inversions are
enough to off-set the tax and non-tax related costs associated with such transactions.
Hypothesis 1: For acquiring firms, tax inversions create shareholder value.
The following two sections are structured as follows. First, an overview of previous
findings regarding firm-determinants of tax inverting firms is laid out. Second, we present a
new set of board-related determinants which we argue are central in this debate and therefore
deserve greater attention in both the academic community. Hence, by studying factors that
directly impact corporate leaders‘ decision making, we hope to shed new light on various
aspects impacting firms‘ propensity to invert.
3.3 Firm-specific determinants of tax inverting firms
Although focused on the time prior to the 2004 American Job Act17
, as mentioned in
section II (regulatory background), Desai & Hines (2002) brings up a number of firm specific
determinants of tax inverting firms. They present evidence that larger firms with extensive
foreign assets, along with significant leverage, are more likely to invert. Similar findings are
found by Col, Liao & Zeume (2016), who present evidence that inverting firms are often
profitable, highly leveraged and earn significant amount of their revenues abroad.
Significant cash holdings of U.S. firms with international subsidiaries are another potential
determinant of firms deciding to re-domicile through corporate inversions. Foley, Hartzell,
Titman & Twite (2007), for instance, show that U.S. multinationals hold significant part of
their assets in cash due to the significant tax costs associated with the repatriation of cash
back to the U.S.18
Col, Liao, & Zeume (2016) also find a positive relation between cash
position and propensity to invert. Similar findings regarding higher cash levels are found by
17
2004 American Job Act as described in section II (Regulatory background). N.B. earlier work published before 2004 in
this field of research should be deemed less relevant due to ongoing changes in the regulatory environment; hence, work
published before the major regulatory American Job Act form 2004 has been given limited exposure in this paper. Another
aspect of older research published in this area is that due to regulatory changes different type of inversions have been
analyzed in different periods. For instance, as most tax haven inversions (see regulatory section) disappeared after the 2004
AJC, we consider those inversions less relevant in today‘s debate. 18 Refer back to section II (Regulatory background) for more information on repatriation of cash to the U.S.
14
Cortes, Gomes & Gopalan (2014), who presents findings that American companies in foreign
countries tend to have more cash on hand than do U.S. based firms.
Another important aspect recently discussed is whether compensation and other
incentivizing factors may drive corporate leaders' propensity to carry out inversions. Babkin,
Glover & Levin (2015) find that although returns for private individuals are negative,
particularly those with medium and long-term investment horizons, the returns for CEOs as a
result of such transactions tend to be positive. This is, they argue, due to the stock option
nature of CEO compensation programs, which are taxed favorably compared to private
individuals‘ capital gains (Babkin, Glover & Levine, 2015). On top of the beneficial tax
schedule for capital gains on options, they find that CEOs of inverting firms receive on
average an additional $3.26 million above their normal pay the year following a tax inversion
(Babkin, Glover & Levine, 2015).
Industry specification has also been analyzed to be one of the major determinants of tax
inverting firms due to the way certain tax heavens treat intangible assets, which, as an
example, constitutes the majority of the assets of pharmaceutical companies (Sharife, 2016).
Bringing up drug-giant Pfizer as an example, in 2012, the ca. $190 billion market19
capitalization company had net tangible assets (NTA) just shy of $6 billion (Sharife, 2016).
Couple that with the fact that companies in the Netherlands, for instance, face a mere 5% tax
rate on revenues stemming from certain intangible assets, such as patents and other R&D
related activities (Nijhof & Kloes, 2010). Desai & Dharmapala (2006) also finds evidence
supporting the notion that high R&D intensive firms are more likely to invert into tax heaven
countries than are other firms.
In additional to firm-specific determinants of tax inverting firms, previous research has
also explored other perhaps less obvious potential determinants. One such paper, published by
Col, Laio & Zeume (2016), seeks to go beyond firm specific determinants and focus more on
country-related corporate governance aspects of tax inversions. Using a large sample of
inverting firms globally, they find that firms are more likely to invert to countries with strong
governance standards and that country-pair specific agreements, such as bilateral Double
Taxation Treaties (DTTs)20
and Tax Information Exchange Agreements (TIEAs)21
, are likely
to increase the amount of inversions.
19 As of 2016-05-09, Pfizer‘s market capitalization was $207.9 billion. 20 DTTs are explained further by Col, Laio & Zeume (2016) 21 TIEAs are explained further by Col, Laio & Zeume (2016)
15
3.4 Board-related determinants of tax inverting firms
Despite the increasing amount of research being published on the topic of tax inversions,
as summarized in previous sections - often centered around shareholder returns or value
creation, along with firm-specific determinants - few conclusions have been drawn around
board-related determinants of tax inverting firms. Therefore, as a way to tackle this gap in the
literature, our objective is to further analyze why firms do not engage more in tax inversions
although there are a number of clear financial benefits associated with them as laid out in the
previous sections.
Foreign directors
In connecting the very limited literature regarding corporate governance and patriotism,
legal scholars such as Yosifon (2015), argue that board of directors‘ decision making may be
impacted by their level of patriotism and that it is reasonable to discuss the consequences of
corporate board members being of different nationalities. If ―patriotism is a virtue‖, he argues,
then U.S. firms should hire primarily American leaders in order to honor American interests.
Some earlier legal research point towards the same direction, putting forward the importance
of the trade-off between shareholder value creation and patriotic behavior. That is, since
firms‘ ultimate objective is to increase shareholder value (Mann, 2004), which in today‘s
globalized economy may require American companies to move both jobs and tax revenues
abroad (Yosifon, 2015), then companies must ignore patriotic objectives in order to increase
shareholder value and to remain competitive. Kate Barton, for instance, who is a partner of
Ernst and Young states that ―the improvement on earnings is powerful enough that maybe the
patriotism issue need to take a back seat‖ (Mann, 2004).
We are first in attempting to empirically connect patriotism with firms‘ decision to invert.
However, some related research does exist and is important to put forward in order to
understand the full scope of this debate. For instance, previous research show that in certain
cases foreign board members have a positive net impact on firm value, particularly for firms
active in cross-border M&A transactions (Masulis, Wang & Xie 2012). The authors argue that
foreign board members have better knowledge of local markets, leading to increased ability to
evaluate potential targets. Minnick and Noga (2010) apply a similar reasoning while arguing
that different tax planning strategies may require different skillsets. For instance, international
tax planning strategies, they argue, are more complex in nature and therefore require more
specialized expertise. Similarly, in a study bringing up the costs and benefits of foreign
directors, where 80 international (non-U.S.) firms were studied, Miletkov & Poulsen (2013),
16
show that companies engaging in cross-border M&A transactions are more likely to have
foreign directors on their boards.
On the cost side of the equation, Miletkov & Poulsen (2013) proposes the idea that foreign
board members may impose organizational challenges in terms of less effective decision
making and worse monitoring of management. Banerjee, Masulis & Pal (2016), for instance,
show that foreign board members are significantly more likely to miss board meetings than
are American board members, suggesting weaker ability to control and impact board
decisions, as well as monitoring of corporate leaders.
In all, based on previous rather limited empirical research, it seems as investors appreciate
the existence of foreign board members on U.S. corporate boards, at least when it relates to
firms highly active in cross-border M&A transactions. Our objective, however, is more
closely in line with the discussion brought to attention by legal scholars (e.g Yosifon, 2015)
that American companies are increasingly putting aside patriotic objectives for shareholder
value creation. More specifically, as a way of understanding the importance of patriotism, we
are interested in determining whether U.S. corporate boards with higher ratio of foreign board
members are more likely to engage in tax inversions. Inspired by Gallamore, Maydew &
Thornock (2013)22
, is it perhaps that foreigners on U.S. corporate boards by definition lower
overall firm-wide patriotism, leading to lower inherent reputational costs for such firms,
thereby increasing firms‘ propensity to invert23
.
Hypothesis 2a: High rates of non-U.S. board members increase firms‘ propensity to invert
Corporate Social Responsibility
The academic consensus regarding CSR, ethics and corporate strategic decision making
seem to point towards a reality where social responsibility and corporate actions go hand in
hand (Goda, O‘Connor & Taylor 2005; Joyner & Payne, 2012; Garriga & Mele, 2003;
Godfrey & Merrill, 2009). For instance, Joyner and Payne (2012) argue that it is a
―fundamental truth‖ that firms and the society cannot survive without each other; hence, firms
must comply with society‘s increased demand of ethical behavior and social responsibility to
22
Although finding no evidence for such reasoning, Gallamore, Maydew, Thomock (2013) hypothesize that only
firms that are immune to reputational costs engage in tax avoidance activities. 23
N.B. we are cautious regarding the by us assumed relationship between patriotism and reputational costs. That
is, we have no empirical evidence that higher degree of patriotism leads directly to higher reputational costs;
instead, this is an assumption based on intuitive reasoning.
17
remain competitive (Joyne and Payne, 2012). Related empirical literature discusses similar
issues. For instance, Lanis & Richardson (2012) show that firms with high CSR engagements
are likely to be less tax aggressive. From a slightly different angle, Godfrey & Merrill (2009)
states that CSR engagement is a way to convey the society that firms are not acting in pure
self-interest, but rather to contribute positively to the society and its various stakeholders.
Therefore, naturally, extensive tax planning cannot easily be reconciled with ethical business
behavior (Godfrey & Merrill 2009). In fact, Sikka (2010) find that many firms act
hypocritically when dealing with CSR related activities; that is, firms engage in CSR related
activities while they are at the same time actively pursuing various tax planning strategies,
including moving assets to foreign tax heavens.
Furthermore, based on one of the first articles (Huseynov & Klamm, 2012) regarding the
relationship between tax avoidance and CSR engagement, the authors find that there is a
relationship between the two variables and conclude that firms with strong community
concerns pay higher effective tax rates, while corporate governance strength and firm
diversity is negatively related to effective rax rates. In other words, certain dimensions of
CSR may have one impact on a firm‘s propensity to pay taxes and engage in tax planning,
while other dimensions of CSR may have another impact firms‘ engagement in tax planning
activities.
Hence, our second hypothesis is based on the more traditional notion that increased CSR
should lead to more engagement in activities that support the society as a whole and the
greater good of the area in which it operates and less in activities, such as tax inversions, that
do not contribute to the society overall24
.
Hypothesis 2b: High degrees of CSR engagement decrease firms‘ propensity to invert
Entrenched Boards
To study the effect of entrenchment on firms‘ propensity to engage in tax inversions, we
study whether firms with staggered boards are more likely to invert. As described by Adams,
Hermalin and Weisbach (2008), staggered board structures are such that board directors are
elected for multiple years at a time, where only a fraction of the board is re-elected each year.
This creates a situation where it becomes difficult for outside investors to impact the
24
In contrary to the common notion and consensus in the public debate a recent study by Gunn & Lys (2015)
show that tax inversions are actually, paradoxically, likely to add value for the U.S. Treasury Department
through increased tax revenues.
18
composition of the board, thereby reducing the risk of losing control of the firm (Bebchuk &
Cohen, 2005; Cohen & Wang, 2013), e.g. through stand-alone proxy contests25
and hostile
takeovers26
.
Past literature show evidence that the existence of entrenchment decreases the likelihood
that firms engage in tax avoidance related activities. Yijiang & Kung (2008), for instance,
present evidence that managers in firms with staggered boards are less motivated to maximize
profits to increase firm value, instead staggered board structures allow managers to live the
quite life (Bertrand & Mullainathan, 2003). This leads managers to be less likely to engage in
various types of tax avoidance activities (Minnick & Noga, 2010). More specifically, Minnick
and Noga (2010) find evidence that firms with entrenched boards pay more domestic taxes
than do their non-entrenched peers, suggesting that entrenched boards are less interested in
tax planning activities. This is consistent with findings presented by Bebchuk & Cohen (2005)
who argues that increased entrenchment lowers firm value. That is, entrenched managers are
not always acting in the best interest of shareholders.
Hence, our third hypothesis is grounded around the notion that entrenched managers are
less likely to engage in tax avoidance related activities, such as tax inversions, due to the idea
that entrenchment leads managers to be less interested in managing taxes.
Hypothesis 2c: High degrees of entrenchment decrease firms‘ propensity to invert
Insider Ownership
The fundamental connection between insider ownership and corporate tax avoidance
hinges on the notion that aligned interest between managers and shareholder interests should
increase a firm‘s propensity to engage in tax planning activities (Desai and Dharmapala,
2006), e.g. tax inversions. Such alignment often strengthens as a consequence of greater
incentives for management, e.g. through equity ownership. A similar discussion is brought to
attention by Armstrong, Blouin, Jagolinzer & Larcker (2013). They argue that CEO and
management equity incentives are related to firms‘ propensity to engage in tax avoidance
activities. More specifically, they suggest that tax avoidance activities shall be seen as
investments, where managers with higher equity incentives are more likely to engage in such
activities.
25
Proxy contest; an action by activists or other shareholders to use their voting power to impact the board or
management composition. 26
Hostile takeover; an action by a firm‘s board and/or management to convince a target firm‘s shareholders to
accept a takeover bid.
19
With findings from previous literature on insider ownership and general tax avoidance
activities in mind, we propose that our sample of tax inversion transactions should yield
similar findings that increased insider ownership increases firms‘ propensity to invert.
Hypothesis 2d: High degrees of insider ownership increase firms‘ propensity to invert
Institutional Ownership
In the literature it is common to connect institutional ownership and corporate governance
based on the notion that institutions with high ownership are more likely to monitor and
control corporate decision making (Ogden, 2003). Desai and Dharmapala (2006), for instance,
use institutional ownership as part of a proxy for institutional ownership, to understand firms‘
propensity to engage in various types of tax sheltering activities.
Nevertheless, the academic community is rather inconclusive as to what impact
institutional ownership may have on tax avoidance related activities; parts of the academic
community argue that institutional ownership is positively related to firms‘ propensity to
engage in tax avoidance related activities and others argue the opposite. Bird and Karolyi
(2015) support the former notion. They find that a 1 percent increase in institutional
ownership increases firms‘ propensity to have a subsidiary in a tax haven by 1.3 percent.
Thus, they suggest that institutional ownership increases the likelihood of firms engaging in
various tax planning activities. Similar findings are presented by Babkin, Glover & Levine
(2015), who find that institutional ownership increases firms‘ propensity to invert. On the
contrary, Khurana and Moser (2012) support the latter alternative. When analyzing corporate
data from 1995-2008 the authors find evidence that institutional ownership, particularly if
long-term oriented, tend to lower firms‘ likelihood to engage in tax avoidance.
Hence, our fifth and last hypothesis is based on the implications of external monitoring on
firms‘ decision making and how that relates to firms‘ propensity to invert. We hypothesis that,
and in line with findings founds by Bird & Karolyi (2015) and Babkin, Glover & Levine
(2015), increased institutional ownership increases firms‘ propensity to invert since
institutional investors, just like managers with high equity stakes, are likely to act in such way
that supports the share price. While our hypothesis is similar to the one provided by Babkin,
Glover & Levine (2015), we contribute by having a more homogenous transaction sample.
Hypothesis 2e: High degrees of institutional ownership increase firms‘ propensity to invert
20
3.5 Summary of hypotheses
Our first hypothesis is analyzed using a common event study methodology often used in
more traditional M&A studies. We study two samples of M&A transactions, where our main
sample of interest is focused around merger inversion transactions post-2004 and our control
sample includes similar transactions not labeled as tax inversions. In matching transactions
one by one we are able to control for firm specific determinants known to drive abnormal
returns, such as size of the acquirer and industry type. We also match announcement days by
year to control for time-varying effects. In using evidence from previous literature, primarily
related to the regulation of tax inversions, as well the financial benefits and potential costs of
such transactions, we construct the following hypothesis:
Hypothesis 1 For acquiring firms, tax inversions create shareholder value.
The second hypothesis consists of five different sub-categories which are all based on the
notion that certain board-related determinants should help us understand board decision-
making as it relates to tax inversions. We employ a logit regression to determine such
relationships, much inspired by similar studies in the field (e.g. Babkin, Glover & Levine,
2015).
Hypothesis 2a High rates of non-U.S. board members increase firms‘ propensity to invert
Hypothesis 2b High degrees of CSR engagement decrease firms‘ propensity to invert
Hypothesis 2c High degrees of entrenchment decrease firms‘ propensity to invert
Hypothesis 2d High degrees of insider-ownership increase firms‘ propensity to invert
Hypothesis 2e High degrees of institutional ownership increase firms‘ propensity to invert
IV. Methodology
This chapter is structured as follows; first, we walk through our data set and describe the
two samples and how they are collected. Secondly, we provide a summary of the event study
methodology used in this study. We conclude by presenting our cross-sectional regressions
used to analyze whether the two samples‘ CAAR are statistically different from each other as
well as our cross sectional logit regressions used to identify the impact of various board-
related determinants on firms‘ propensity to invert.
21
4.1 Data collection
In this study we employ a unique data set containing all, to our knowledge, announced tax
inversion transactions post-2004. The reason for choosing only transactions after 2004 is
because of the Americans Job Act regulation (see Section II; Regulatory background) that
changed the ecosystem of tax inversions. Our sample is similar to Gunn and Lys (2016), but
different from Babkin, Glover & Levine (2015) along with earlier studies from the early
2000‘s. In contrary to the sample used by Gun and Lys (2015), however, we only use merger
inversions, while they include re-incorporations and spin/split-offs; hence the difference in
sample sizes. After screening for post-2004 transactions, as well as removing non-merger
inversions, a final sample of 28 transactions is identified. Two additional transactions are re-
moved due to overlapping event windows (McKinley, 1989).
Using a larger sample size would have the possibility to give better validity and
significance of our results. However, our decision to only include a certain type of
transactions increases our ability to draw correct inference around the determinants of merger
inversions, specifically. This decision enables us to compare post-2004 merger inversions,
often directed to European countries with high governance laws with pre-2004 re-
incorporation inversions often directed to countries with low governance laws. Hence, by only
studying merger inversions we focus our research towards one type of transactions, which by
itself contributes to the current rather limited literature on tax inversions.
The data is collected from five different databases, including Merger Market, Thomson
Reuters Datastream & Eikon, Bureau van Djik‘s Zephyr, SEC Edgar and Capital IQ. For full
description of how the different databases27
are used to specify the inversion sample28
of 26
transactions and the peer group sample29
of 26 transactions visit appendix 1-3. We construct
the peer sample by matching each one of the tax inversions with transactions where U.S. firms
acquire an international firm but where the country of domicile remains in the U.S.
Announcement dates are used as the sole confirmation as to whether the firm chose to
invert or not, i.e., we do not account for what actually happened after the announcement.
Sample correction due to event clustering
27
See Appendix A1 28
See Appendix A2 29
See Appendix A3
22
The analysis of aggregating abnormal returns (AAR) assumes that event windows of the
included transactions do not overlap. This assumption is crucial when calculating the variance
of the AAR without having concerns about the covariance across returns (MacKinlay, 1997).
In order to avoid overlapping, often called event clustering, two transactions are removed.
Hence, the original sample of 28 transactions is reduced to 26.
In addition to the two transactions, we remove two other transactions that overlap by three
days. However, due to our small sample sizes these transactions remain in our analysis. In
fact, studies have shown that partial overlaps for shorter event windows (≤11 days) do not
produce any measurable bias (Karafiath, 2008).
23
Company Announced Target Destination Industry Market Value* Description***
Actavis 20-05-2013 Warner Chilcott Ireland Pharmaceuticals 88,9B Actavis Inc, a specialty pharmaceutical company, develops, manufactures, markets, and distributes
medical aesthetics, biosimilar, and over-the-counter pharmaceutical products worldwide.
Alkermes** 09-05-2011 Elan Drag Technologies Ireland Pharmaceuticals 5,99B Alkermes plc, a biopharmaceutical company, researches, develops, and commercializes pharmaceutical
products that are designed to address unmet medical needs of patients in various therapeutic areas
worldwide
Applied Materials Inc. 24-09-2013 Tokyo Electron Netherlands Industrials 22,59B Applied Materials, Inc. provides manufacturing equipment, services, and software to the semiconductor,
display, solar photovoltaic (PV), and related industries worldwide.
Argonaut 14-03-2007 PXRE Bermuda Insurrance 446,74M Argonaut Gold Inc. engages in the exploration, development, and production of gold and silver in North
America.
Arris Group 22-04-2015 Unit of OCI NV UK Telecom 4,42B ARRIS International plc provides media entertainment and data communications solutions in the United
States and internationally.
Burger King (RBI) 26-08-2014 Tim Hortons Canada Food 9,94B Restaurant Brands International Inc. owns and operates quick service restaurants under the Burger King
and Tim Hortons brand names.
C&J Energy Services Ltd. 25-06-2014 Nabor Industries Ltd. Bermuda Energy 125,02M C&J Energy Services, Ltd. provides completion and production services for oil and gas industry
primarily in North America.
Chiquita Brands 10-03-2014 Fyffes Ireland Food 668,65M Chiquita Brands International, Inc., together with its subsidiaries, markets and distributes bananas,
pineapples, and packaged salads primarily in the United States, Central America, Europe, the Middle
East, and Asia.
Eaton 21-05-2012 Cooper Industries Ireland Energy 28,44B Eaton Corporation plc operates as a power management company worldwide.
Endo International 05-11-2013 Paladin Labs Ireland Pharmaceuticals 3,46B Endo International plc develops, manufactures, and distributes pharmaceutical products and devices
worldwide.
Horizon Pharma 19-03-2014 Vidara Technologies Ireland Pharmaceuticals 2,35B Horizon Pharma plc, a biopharmaceutical company, engages in identifying, developing, acquiring, and
commercializing medicines for the treatment of arthritis, pain, inflammatory, and/or orphan diseases in the
United States and internationally.
IHS Inc 21-03-2016 Markit Inc UK Data 8,22B HS Inc. provides information, insights, and analytics to multinational companies, governments, small
companies, and technical professionals in various industries worldwide.
Jazz Pharmaceuticals 19-09-2011 Azur Pharma Ireland Pharmaceuticals 8,93B Jazz Pharmaceuticals Public Limited Company, a biopharmaceutical company, identifies, develops, and
commercializes pharmaceutical products for various medical needs in the United States, Europe, and
internationally
Johnson Controls 25-01-2016 Tyco International Ireland Industrials 26,7B Johnson Controls, Inc. operates as a diversified technology and industrial company worldwide.
Liberty Global 05-02-2013 Virgin Media UK Telecom 31,55B Liberty Global plc, together with its subsidiaries, provides video, broadband Internet, fixed-line
telephony, and mobile services in Europe, Chile, and Puerto Rico
Livanova (Cyberonics) 26-02-2015 Sorin UK Pharmaceuticals 2,34B LivaNova PLC, a medical technology company, design, develops, manufactures, and sells therapeutic
solutions worldwide.
Medtronic 15-06-2014 Coviden Ireland Pharmaceuticals 113,81B Medtronic plc manufactures and sells device-based medical therapies worldwide.
Mylan 14-08-2014 Abbott's generics unit Netherlands Pharmaceuticals 20,75B Mylan N.V., together with its subsidiaries, develops, licenses, manufactures, markets, and distributes
generic, branded generic, and specialty pharmaceuticals worldwide.
Pentair Ltd. 28-09-2012 Tyco Flow Control LTD Ireland Industrials 10,54B Pentair plc operates as a diversified industrial manufacturing company in the United States, Europe, and
internationally.
Perrigo 29-07-2013 Elan Ireland Pharmaceuticals 13,33B Perrigo Company plc, together with its subsidiaries, develops, manufactures, markets, and distributes
over-the-counter (OTC) consumer goods and pharmaceutical products worldwide.
Pfizer 23-11-2015 Allegran Ireland Pharmaceuticals 221.7B Pfizer Inc., a biopharmaceutical company, discovers, develops, manufactures, and sells healthcare
products worldwide.
Steris 13-10-2014 Synergy Health UK Pharmaceuticals 6,23B Steris Plc provides infection prevention, contamination control, surgical, and critical care technologies
worldwide.
Stratasys 16-04-2012 Objet Israel Data 1,13B Stratasys Ltd. provides three-dimensional (3D) printing and additive manufacturing (AM) solutions for
the creation of parts used in the processes of designing and manufacturing products.
Terex 11-08-2015 Konecranes Finland Construction 2,69B Terex Corporation operates as a lifting and material handling solutions company
Tower Group 05-08-2008 Castlepoint Holdings Bermuda Insurance 127,77M Tower Group provides specialized property and casualty insurance products and services to small to
mid-sized businesses and to individuals in New York City and the adjacent areas of New York State.
Wright Medical 27-10-2014 Tornier Netherlands Pharmaceuticals 1,9B Wright Medical Group N.V., a medical device company, designs, manufactures, markets, and sells
orthopedic products in the United States, Europe, and internationally.
** Alkermes Presents Phase 2 Data of ALKS 37 in Late-Breaking Oral Session at Digestive Disease Week Meeting at Announcement Day of Inversion.
*** Obtained from Mergermarket
The final sample of included tax inversions with accompanied transaction data.
List of Tax Inversions
* Market value of equity is measured at the announcement date.
24
4.2 Event Study
We use a standard event study methodology proposed by MacKinlay (1997) to examine
the market reaction around the announcement day of tax inversions. We start by defining an
event window, during which the actual event occurs, and an estimation window, during which
our asset model parameters are estimated. We use our estimated parameters to estimate the
expected normal returns in the event window. Lastly, abnormal returns, AR, are calculated by
the difference between the actual return on the stock during the event window and the
expected normal return for the company if no event had occurred. Regarding the literature on
tax inversions, event studies are relatively common (e.g. Desai & Hines, 2002; Seida &
Wempe, 2002; Babkin, Glover & Levine, 2015).
As proposed by MacKinlay (1997), our estimation window consists of 120 trading days,
while our event windows consist of two, three, seven and eleven days. In order to properly
estimate the model parameters used to calculate the expected normal returns, the event
window is set to start the day after the estimation window ends. This is important because the
parameters used in the event study should not be influenced by the possible abnormal returns
caused by the event (MacKinlay 1997).
The event day is the day during which our sample firms for the first time announce their
intention to invert. These dates are identified in Merger Market and through EDGAR filings.
In cases where announcements were made when the market was not open, e.g. at night or on
the weekends, the first day of trading after the announcement day is used as the event day.
Using the announcement day, T, as event the event day has been shown suitable when
measuring wealth effects of M&A activity (Datta et al 1992).
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑖𝑜𝑛 𝑤𝑖𝑛𝑑𝑜𝑤 𝑜𝑓 120 𝑡𝑟𝑎𝑑𝑖𝑛𝑔 𝑑𝑎𝑦
𝐸𝑣𝑒𝑛𝑡 𝑤𝑖𝑛𝑑𝑜𝑤 𝑑 𝜖 (1,2,3,5)
𝑇
𝑇 + 𝑑
𝑇 − 𝑑
𝑇;125
25
Estimating normal returns using the market model
There are a number of different approaches to estimate the expected normal returns for
equities, including the Constant Mean Return Model and the Market Model, both of which are
statistical models based on various statistical assumptions (MacKinley, 1997). In this study
the market model is used as a way to estimate the normal expected returns during the event
window. The statistical assumptions underlying this model are that asset returns are jointly
multivariate and independently and identically distributed (IID) (MacKinlay 1997). These
assumptions are sufficient for the Market Model to correctly estimate our model parameters
(MacKinlay 1997).
Further, we use the market model since it has been frequently used when evaluating the
stock price reactions to announcements of M&A transactions (Shleifer, A., & Vishny, R. W.
(2003); Fama, Fisher, Jensen & Roll, 1969). The market model is also relatively easy and
straight forward to use, while at the same time generating proper and sufficient parameter
estimates. Lastly, and compared to other models, such as the Constant Mean Return model,
MacKinley (1997) argues that the Market Model provides superior parameter estimates with
lower variance, which increases the ability to capture abnormal returns. In this study, we use
the same notations as proposed by MacKinlay (1997) when presenting our Market Model
formula.
+ + 1.
( 0) ( 2) 2.
OLS regressions of on are used to estimate the Market Model parameters
(intercept, 30 and the slope,
31), where is the return of stock, i, and is the return
of the market portfolio. Since all our sample firms are U.S. companies, we use the S&P500
Composite to reflect the returns of the market portfolio. This index is the most commonly
used and well-known U.S. stock index covering the 500 largest stocks in different industries.
The returns for the S&P500 Composite are retrieved through Thomson Reuters Datastream
using time series requests and the symbol S&PCOMP. Given the estimated parameters the
expected returns32
during the event windows are calculated.
30
−
31
∑ (
; )( ; )
∑ (
; )
32 +
26
Abnormal Returns
We estimate the firm-specific abnormal returns for each day within the event window
using following formula:
− 3.
Where is the expected normal return for stock, i, at time t. Next we aggregate the
abnormal returns across firms for each day to obtain sample-wide average abnormal returns,
or AAR.
1
∑
<1
4.
Cumulative Abnormal Returns
Stock returns are also aggregated across time in order analyze multi-period event windows.
Formula (5) visualizes how we aggregate AARs through time to retrieve a sample-specific
cumulative average abnormal return (CAAR), or
( ; , : ) ∑
:
< ;
Alternatively, as shown in formula (6), one could also take the average of the
estimated firm-specific cumulative abnormal returns (CAR) to retrieve the same
result as in formula (5).
5.
( ; , : ) 1
∑ ( ; , : )
:
< ;
6.
As a way to verifying the abnormal returns we present p-values indicating the significance
of our results, as well adjusting the sample returns for outliers.
27
4.3 Modeling the market reaction of inversion
To draw further theoretical insights from our results in the event study we apply several
cross-sectional regression models according to the principle of MacKinlay (1997). We use
these models to investigate how different firm and transaction specific variables affect returns.
Most importantly, we run these regressions with the objective to evaluate how CARs are
affected by transactions characterized as tax inversions, which would help us verify the
descriptive results from the initial event study. In the model, a dummy variable is used to
denote whether the transaction is a tax inversion or a regular international cross-border M&A.
In addition, several control variables are included to control for other factors that have already
been proven to drive shareholder value in M&A transactions (see variables list).
The first regression is related to our first hypothesis (section 3.5; Summary of hypotheses);
that is to gauge whether tax inversions generate higher, lower or similar CAAR than do non-
inversion transactions. In order to examine such relationships, we run both a univariate and
multivariate regression for several event windows. In essence, the multivariate regression is
an extended version of the univariate model that tries to isolate the effect of our tax inversions
on CAAR by controlling for other already proven drivers of CAAR.
The univariate and multivariate regressions are specified in (7 & 8). We run them for all
our estimated event windows. For fully specified regressions and list of variables (see
Appendix; A4: OLS regression specification, A6: Variables).
( ; , : ) + 1 +
7.
( ; , : ) + 1 + 2 + 3 +
+ 5 + 6 + 7 + 8 + 9 +
1 + 11 + 12 +
8.
28
4.4 Modeling the decision to invert
Our framework is inspired primarily by models employed by Babkin, Glover & Levine
(2015) and Col, Liao & Zeume (2016), where the objective has been to analyze how certain
firm determinants impact firms‘ propensity to invert through the use of logit regressions, or
the like. Desai and Hines (2002) also use a similar logit regression framework. We choose the
logit model over the similar probit model since it is recommended by Vermeulen & Berkema
(2001) as a superior model for smaller samples. While the logit model is similar to the OLS
linear regression, there are differences. For instance, and perhaps most importantly, the logit
model uses the maximum likelihood method to estimate the model parameters (Brooks,
2008). This yields a different interpretation of the coefficients compared to an Ordinary Least
Square model. That is, a one unit increase in the independent variable does not yield an
increase/decrease in the dependent variable. Instead, a one unit increase in the independent
variables will cause an increase/decrease in the likelihood that the dependent variable is ―1‖.
Therefore, the logit model fits our purpose perfectly as our objective is to evaluate a number
of potential firm-specific and board-related determinants of inverting firms.
The main variables of interest in this study are related to various aspects of board-related
determinants, while control variables are included to control for firm-specific determinants
that are already proven by previous literature to have an impact on firms propensity to invert.
In our model, we run each one of our main variables of interest together with all control
variables, as shown in regression (9). The X33
is specified as the variable of interest (for fully
specified regressions see Appendix A5: Logit regression specification; and A6: Variables).
+ 1 + 2 + 3 + 4 + 5
+ 6 + 7 +
9
.
33 X: Foreign Board, CSR, Entrenchment, Insider and Institutional as variable of interest.
29
V. Empirical Results
5.1 Market reaction to the inversion decision
The market reaction to the announcement of a firm‘s decision to carry out a tax inversion
offers important insights as to the shareholder value creation aspect of such transactions, as
the increase in stock price reflects the change in market value of the firm. By comparing a
sample of tax inverting firms with regular cross-border M&A transactions, while integrating a
number of control variables, we isolate the effect of the additional tax savings and other
financial benefits earned from inversions. Table 1 presents short-term market reactions to our
26 inversion announcements as well as p-values for each average abnormal return (AAR) and
cumulative average abnormal return (CAAR), along with the number of positive and negative
reactions.
We report positive and significant CAAR across event windows for the inversion sample,
as is the AAR on the event day, suggesting that investors do appreciate such transactions. In
particular, we report an average abnormal return of 4.74% on the event day compared to -
0.07% for the peer group. We also report highly significant CAAR of at least 6.44% across
our four sub-event windows, while the peer group reports insignificant returns of between 0-
1%. While our findings are not in line with earlier studies focused on pre-2004 transactions
(e.g Desai & Dharmapala, 2002; Seida & Wempe, 2003) we do report similar results to those
reported by Babkin, Glover & Levine (2015), where returns34
of their inversion sample35
are
strongly abnormal (4.92%), while the abnormal returns of the control sample are close to zero.
In the lower section of Table 1 four different event windows are presented to capture
potential leakages of information prior the event. Returns are consistent across event windows
indicating no major leakages.
34
The returns reported by Babkin, Glover & Levin (2015) are based on mean CAR across sample firms, where
mean CAR is the mean cumulative abnormal returns over a six-day period, including two days before the event
window and three days after the event window (Babkin Glover & Levin, 2015). 35
That is, mean CAR for acquirers in their merger inversion sub-sample.
30
We perform the same testing procedure for the control group; Table 2 presents related
findings. We find that the average abnormal return on the event day is slightly negative,
while the average abnormal returns for the remaining days within the event window present
mixed results, yet they are universally close to zero indicating no abnormal returns. The non-
value creating results of our peer sample are consistent with the extensive M&A literature on
M&A value creation (e.g. Haleblian, Devers &McNamara, 2009).
In order to increase the validity of our results, we winsorize our abnormal returns across
stocks as well as our cumulative abnormal returns at the 10% level. As reported, returns only
differ slightly after having adjusted for outliers. We also perform a Mann Whitney test using
the winsorized CAAR data series in order to compare the two samples36
. Z-scores well above
1.96 indicate that our two sample groups‘ means are statistically different from each other.
36
See appendix A7
Returns Winsorized returns (10% )
Day AAR P-value No.pos.obs No.neg.obs AAR P-value No.pos.obs No.neg.obs
-5 0,10% 0,6578 15 11 0,12% 0,5359 13 9
-4 0,05% 0,8696 15 11 0,04% 0,8207 13 9
-3 -0,14% 0,6836 10 16 -0,15% 0,5307 8 14
-2 0,68%* 0,0576 17 9 0,75%** 0,0198 15 7
-1 0,75% 0,3485 12 14 0,12% 0,6458 10 12
0 4,74%** 0,0291 19 7 4,19%** 0,0247 17 5
1 0,94% 0,1216 17 9 0,95%* 0,0803 15 7
2 0,49% 0,2826 16 10 0,59% 0,1795 14 8
3 0,26% 0,7603 11 15 0,05% 0,8749 9 13
4 -0,50% 0,2884 10 16 -0,37% 0,1754 8 14
5 -0,09% 0,8307 12 14 -0,11% 0,7227 10 12
Day CAAR P-value No.pos.obs No.neg.obs CAAR P-value No.pos.obs No.neg.obs
5 7,30%** 0,0193 18 8 5,02%** 0,0286 16 6
3 7,70%** 0,0136 22 4 5,30%** 0,0136 19 3
2 7,57%*** 0,0086 21 5 5,78%** 0,0159 18 4
1 6,44%** 0,0110 20 6 4,92%** 0,0177 19 3
The table shows the abnormal returns and the cumulative abnormal returns (including winsorized abnormal returns) for
the peer transactions. The sample consist of 26 observations between 2004 and 2016.
Table 1
Tax Inversion: Event Study
31
Lastly, we present results in a diagram to visualize the average abnormal returns each day
within our event window. Results for both samples are included (Figure 1).
Returns Winsorized returns (10% )
Day AAR P-value No.pos.obs No.neg.obs AAR P-value No.pos.obs No.neg.obs
-5 -0,15% 0,6521 13 13 -0,22% 0,3952 11 11
-4 0,08% 0,8536 13 13 -0,13% 0,4856 11 11
-3 0,25% 0,2652 17 9 0,24% 0,1829 15 7
-2 0,18% 0,5350 13 13 0,05% 0,8201 11 11
-1 -0,46% 0,5211 14 12 0,19% 0,3409 12 10
0 -0,07% 0,8941 14 12 0,02% 0,9573 12 10
1 0,43% 0,3256 17 9 0,38% 0,2168 15 7
2 0,41% 0,1275 15 11 0,29% 0,1427 13 9
3 -0,02% 0,9607 14 12 -0,07% 0,8142 12 10
4 0,23% 0,5971 14 12 0,19% 0,4298 12 10
5 0,14% 0,4327 16 10 0,02% 0,8195 14 8
Day CAAR P-value No.pos.obs No.neg.obs CAAR P-value No.pos.obs No.neg.obs
5 1,02% 0,4330 16 10 0,53% 0,1977 12 10
3 0,72% 0,4083 16 10 0,83% 0,1004 16 6
2 0,48% 0,5800 16 10 0,65% 0,1034 15 7
1 -0,10% 0,9234 18 8 0,40% 0,3917 14 8
The table shows the abnormal returns and the cumulative abnormal returns (including winsorized abnormal returns) for
the peer transactions. The sample consist of 26 observations between 2004 and 2016.
Table 2
Peer Transactions: Event Study
32
By examining the results over the 11-day event period (see A8), we gain further insight as
to what specific transactions are contributing the most to our average abnormal return of
4.74% on the event day. Most of our returns are positive on the day of announcement, in fact,
73% of event day abnormal returns are positive and approximately 20% of the transactions
generate more than 10% abnormal returns on the day of announcement. To verify that returns
are not impacted by other firm specific events, such as announcement of initiated dividend
payouts, SEC filings and news archives around the day of announcement are screened. For
instance, Endo International posted abnormal returns of staggering 25.38% on the day of
announcement (05-11-2013) and Arris Group posted returns of 19.77% (22-04-2015). After
screening companies‘ news archives around the event day, one event was detected37
.
Although the two stocks contribute significantly to the AAR on the event day, after removing
outliers (including aforementioned stocks as well as the two lowest returning stocks) the AAR
is still significant and highly positive (4.19%).
Further, and important to be aware of in event studies on tax inversions is that it is very
difficult to isolate firms‘ real, or true, intention when carrying out this type of transactions.
More specifically, it is critical to understand whether tax inversions are driven purely by tax
avoidance motives or if the motives are combinations of tax avoidance benefits and other
more operational synergies. For instance, as reported by Arris Group in their official
announcement on April 22nd
2015 regarding the transaction they state that the reason for the
deal is partly due to tax savings (28% down to 26% in effective tax rate) but also due to a
37
―List of Tax Inversions‖ (p.22) provides information on other events around day of announcement.
-1,00%
0,00%
1,00%
2,00%
3,00%
4,00%
5,00%
-5 -4 -3 -2 -1 0 1 2 3 4 5
Figure 2: Average abnormal returns
Inversion Control Group
33
number of other benefits (Arris Group, 2015); e.g. access to a new business segments,
enhanced international presence, expanded product portfolio and other additional operational
synergies.
Moreover, most of our firms operate in or are closely related to the pharmaceuticals
industry. As pharmaceutical companies‘ assets often consist primarily of intangible assets
(Sharife, 2016) such companies tend to benefit tremendously by moving to countries such as
the Netherlands, a country which has a significantly lower tax rate on revenues stemming
from intangible assets. The AAR for the pharmaceutical sub-group within the inversion
sample is 4.23%, while the peer group posted abnormal returns of just 0.06% on the
announcement day, suggesting that investors dearly appreciate the additional tax breaks on
certain assets offered in countries such as the Netherlands.
We also report noteworthy observations regarding three transactions where acquirers
merge with companies in Bermuda, a traditional tax heaven country with low transparency
(Dincer & Eichengreen, 2007) and low governance standards (Col, Liao & Zeume, 2016).
Despite a very low number of observations, transactions directed to Bermuda generate 1.62%
in return while the sub-sample of firms inverting to Ireland generate 4.78% in return. These
findings are consistent with findings by e.g. Col, Liao & Zeume (2016) who connects tax
transparency agreements and government laws with firms‘ propensity to invert. Further, this
line of reasoning also sheds new light on the notion that pre-2004 transactions create less
shareholder value (Desai & Hines, 2002) than post-2004 transactions (Babkin, Glover,
Levine, 2015). Due to the fact that we only have a few data points one should be extremely
cautious regarding this type of analysis. In fact, we bring this to attention more as an
observation than any sort of empirically proven fact.
5.2 Further evidence on market reactions to tax inversions
Univariate cross-sectional regressions
To further strengthen our results from the event study, a univariate cross-sectional
regression is employed to investigate whether inversions drive CAAR; results are presented in
Table 4. Not surprisingly, and in line with findings from the event study, we find positive and
significant results that inversions do generate superior CAAR compared to non-inverting
M&A transactions. This difference should be attributable, at least theoretically, to the
increased post-merger cash flows due to the lower tax bill along with other benefits generated
from tax inversions. We also propose the notion that inversion transactions are more
appreciated by investors simply because cash flows saved from lower taxes are easier to
34
compute and evaluate than are more intangible costs and revenue synergies retrieved from
regular M&A transactions 38
.
As noted in earlier sections, a critical observation to make when comparing our results to
previous studies is the fundamental difference in sample types, where we only include
transactions post the 2004 regulatory changes. We argue that there are two potential reasons
for why earlier inversion studies only report low and insignificant results while we and
Babkin, Glover & Levine (2015) are able to show significant and positive results. First, and in
line with Col, Liao & Zeume (2016), we propose the possibility that transparency and other
country specific governance related aspects are critical when investors evaluate inversions.
That is, pre-2004 inversions were directed towards countries with low governance laws and
low transparency (Col, Liao & Zeume 2016; Dincer & Eichengren, 2007) while post-2004
38
See analysis on Stanley Works conducted by Desai and Hines (2002).
Dep. Var INVERSION Adj. R²
CAAR (-1,1) 0.065443***
(0.0015)
0.18
WCAAR(-1,1) 0.051213***
(0.0027)
0.16
CAAR(-2,2) 0,0701*** (0.0009) 0.20
WCAAR(-2,2) 0.057928***
(0.0012)
0.19
CAAR(-3,3) 0.069792***
(0.0030)
0.16
WCAAR(-3,3) 0.050177***
(0.0021)
0.15
CAAR(-5,5) 0.062795** (0.0137) 0.12
WCAAR(-5,5) 0.044481** (0.0460) 0.06
Table 3
CAR Analysis: Univariate Cross-Sectional Regressions
The table below shows the results from the multivariate cros-sectional regressions
regressed on our 4 specified event windows (CAR -1,+1; CAR -2,+2; CAR -3,+3; CAR -
5,+5) for analyzing the inversion aspect on CAR. The variable of interest is the
Inversion dummy variable that takes the value 1 for all tax inversions and 0 for all non-
inversion cross-border M&A. We present the β-coefficient for each variable and the P-
values in parenthesis. We run the regressions with White heteroskedasticity-
consistent standard errors & covariance. The WCAR represents the winzorized CAR at
10%.
Significance: *=10%, **=5%, ***=1%
35
transactions were, and still are, directed towards highly transparent European countries such
as Ireland and the Netherlands. Hence, our results in combination with results from pre-2004
studies may support findings by Col, Liao & Zeume (2016) that firms inverting into countries
with higher corporate governance laws (e.g. Ireland) will gain a higher abnormal return than
firms inverting into countries with lower corporate governance laws (e.g. Bermuda). Recent
public debates allow for similar reasoning; e.g., in the debate regarding ―The Panama Papers‖
(ICIJ, 2016) countries like Ireland and Netherlands are not considered by the media and the
public as tax heavens leading them not to get as much attention and exposure as do more
traditional tax heavens such as Bermuda (Stewart, 2013).
A second plausible reason to explain the higher abnormal returns for post-2004
transactions (i.e. when comparing our results with earlier studies) is that such inversions are
likely to also generate a variety of operational synergies as opposed to pre-2004 transactions,
where target companies often did not have any significant business operations in the country
to which firms inverted (Section II; Regulatory background). Such findings are in line with
the regulatory changes included in the 2004 American Jobs Act where inverting firms now
had to invert with companies that had substantial amount of operations in its country of
domicile39
.
Multivariate cross-sectional regression
The multivariate cross sectional regression (Table 4), presents similar, yet more robust,
results compared to the univariate model (Table 3) as it relates to the dummy inversion
variable. For the tax inversion dummy variable, all CAAR data points are positive and
significant. Adjusted R2 is also improved compared to the univariate model, as expected.
Additional variables are used to control for such variables that have already been accounted
for in previous literature40
. Along with inversions, we report significant results for relative
size, leverage, and cash. Relative size is consistently negative and significant across event
window periods, indicating that M&A transactions where the deal value is a larger percentage
of the acquiring firm‘s market capitalization generate lower returns for the acquiring firm
compared to transactions where the deal size is relatively small. These results are puzzling as
we expect the opposite; that is, larger relative deals to contribute positively to returns (see A6
Variables). For leverage, we report six significant data points, where three coefficients are
positive and three are negative. The positive coefficients are recorded for the shorter event
39
Section II; Regulatory Background (see 25% rule) 40
See appendix A6: Control variables.
36
windows and the negative coefficients are recorded for the longer event windows, potentially
indicating that investors initially appreciate that firms are levered when firms engage in M&A
transactions. Lastly, we find two significant data points for cash, indicating that cash rich
firms tend to generate higher abnormal returns for M&A transactions in general.
Important to note is that since we are referring to the greater and more general M&A
literature in this section, due to the limited amount of research in our specific area of interest,
it may very well be that certain firm-specific determinants are viewed differently by investors
depending on type of M&A transaction. Leverage, for instance, which is closely related to
taxes, due tax shields and interest deductibility, may be viewed differently when investors
analyze regular M&A transactions compared to tax inversions.
In all, our univariate and multivariate cross sectional regressions point towards the same
conclusion, that post-2004 tax inversions do generate more shareholder value that do regular
cross-border M&A transactions. To validate the specification of our model we present
adjusted R2
values. Further, after adjusting our data points for outliers we perform a Breusch-
Pagan test to test for heteroscedasticity41
as well checking our independent variables
(including control variables) for multicollinearity by running a correlation matrix42
.
Next, we dig deeper into the discussion regarding firm determinants of inverting firms to
understand what type of firms are more likely to carry out tax inversions. More specifically,
we provide a unique set of board-related variables to understand how certain aspects of
corporate decision making and behavior impact firms‘ propensity to invert.
41
Appendix A7: Model validity 42
Appendix A7: Model validity
37
5.3
Dep
. Va
rIN
VE
RS
ION
RE
L_
SIZ
ES
IZE
ST
AK
EA
DV
ISO
RD
IVE
RS
TO
BIN
SQ
LE
V1
I_P
HA
RM
AC
AS
HC
Ad
j. R
²#
Ob
serv
ati
on
s
CA
AR
(-1
,1)
0.10
2281
**
*
(0.0
068)
-0.0
9373
3**
(0.0
294)
-3.9
5E-1
3
(0.1
581)
-0.0
6901
1**
(0.0
1796
)
0.01
1792
(0.5
823)
0.02
2672
(0.4
846)
0.00
3748
(0.4
146)
0.06
078*
*
(0.0
230)
0.00
6079
(0.8
355)
0.13
3962
(0.1
316)
0.03
2806
(0.4
164)
0.57
674
48
WIN
-CA
AR
(-1
,1)
0.04
7940
**
(0.0
303)
-0.0
2158
1*
(0.0
717)
-1.7
7E-1
3
(0.3
877)
-0.0
3631
0
(0.3
022)
0.01
7268
(0.3
533)
-0.0
1448
0
(0.4
622)
0.00
5399
(0.2
154)
0.00
3373
(0.1
356)
0.02
2689
(0.2
977)
0.18
3352
**
(0.0
397)
0.01
0923
(0.7
338)
0.54
372
45
CA
AR
(-2,
2)0.
1039
56*
*
(0.0
113)
-0.0
6801
7**
(0.0
196)
-6.4
9E-1
3
(0.1
592)
-0.0
5560
4
(0.2
508)
0.01
3876
(0.5
052)
0.00
5108
(0.8
524)
0.00
2437
(0.6
169)
0.03
711*
*
(0.0
420)
0.00
3858
(0.8
994)
0.18
7440
(0.0
841)
0.02
4508
(0.5
642)
0.64
304
48
WIN
-CA
AR
(-2
,2)
0.05
8857
**
(0.0
413)
-0.0
2067
9**
(0.0
268)
-4.9
8E-1
3
(0.3
066)
-0.0
5031
2
(0.2
035)
0.02
1041
(0.2
404)
-0.0
2381
6
(0.2
000)
0.00
5496
(0.2
274)
0.00
0901
*
(0.0
846)
0.02
3044
(0.3
390)
0.13
5424
(0.1
460)
0.03
3316
(0.4
131)
0.58
338
45
CA
AR
(-3,
3)0.
0948
69*
*
(0.0
364)
-0.0
3654
2**
(0.0
154)
-8.0
7E-1
3
(0.5
019)
-0.0
4752
6
(0.3
401)
0.01
6314
(0.4
643)
-0.0
1475
4
(0.6
333)
0.00
3828
(0.5
337)
-0.0
0453
8**
(0.0
472)
0.01
5798
(0.6
895)
0.10
6600
(0.1
790)
0.04
3004
(0.3
290)
0.59
324
48
WIN
-CA
AR
(-3
,3)
0.04
2316
*
(0.0
731)
-0.0
0743
8**
(0.0
194)
-4.8
7E-1
3
(0.2
404)
-0.0
2192
5
(0.5
290)
0.01
0588
(0.5
322)
-0.0
3639
0*
(0.0
620)
0.00
3277
(0.4
454)
-0.0
0233
4*
(0.0
952)
0.02
6784
(0.1
979)
0.12
7436
*
(0.0
546)
0.02
8674
(0.4
483)
0.54
933
45
CA
AR
(-5,
5)0.
0884
13*
*
(0.0
461)
-0.0
4135
1**
*
(0.0
080)
-9.6
0E-1
3
(0.4
717)
-0.0
5877
5
(0.3
293)
-0.0
0464
5
(0.8
637)
-0.0
1009
7
(0.7
573)
0.00
2313
(0.7
966)
-0.0
0507
6**
(0.0
440)
0.01
4461
(0.7
137)
0.06
9459
(0.5
993)
0.08
0763
(0.2
147)
0.54
323
48
WIN
-CA
AR
(-5
,5)
0.05
1317
*
(0.0
920)
-0.0
1109
0**
*
(0.0
059)
-7.4
0E-1
3
(0.8
193)
-0.0
6631
7
(0.2
756)
-0.0
0588
7
(0.8
261)
-0.0
0448
4
(0.8
829)
-0.0
0022
6
(0.9
779)
-0.0
0077
4
(0.1
216)
0.00
4755
(0.8
866)
0.10
0005
(0.3
992)
0.07
0372
(0.2
961)
0.51
883
45
Tab
le 4
CA
R A
naly
sis
: M
ult
ivari
ate
Cro
ss-S
ecti
on
al
Re
gre
ssio
ns
Sig
nif
ican
ce: *
=10
%, *
*=
5%, *
**
=1%
Th
e ta
ble
bel
ow
sh
ow
s th
e re
sult
s fr
om
th
e m
ult
ivar
iate
cro
s-se
ctio
nal
reg
ress
ion
s re
gre
ssed
on
ou
r 4
spec
ifie
d e
ven
t w
ind
ow
s (
CA
AR
-1,
+1;
CA
AR
-2,
+2;
CA
AR
-3,
+3;
CA
AR
-5,
+5)
fo
r an
aly
zin
g t
he
inv
ersi
on
asp
ect
on
CA
R.
Th
e v
aria
ble
of
inte
rest
is t
he
In
vers
ion
du
mm
y v
aria
ble
th
at t
akes
th
e v
alu
e 1
for
all t
ax in
ver
sio
ns
and
0 f
or
all n
on
-in
ver
sio
n c
ross
-bo
rder
M&
A. W
e p
rese
nt
the
β-c
oef
fici
ent
for
each
var
iab
le a
nd
th
e P
-val
ues
in p
aren
thes
is.
We
run
th
e re
gre
ssio
ns
wit
h W
hit
e h
eter
osk
edas
tici
ty-c
on
sist
ent
stan
dar
d e
rro
rs &
co
var
ian
ce. T
he
WIN
-CA
R r
epre
sen
ts t
he
win
zori
zed
CA
R a
t 10
%.
38
Empirical analysis of the decision to invert
In the following section the empirical results from the multivariate logit regressions model
are presented; results from the control variable are presented first followed by a presentation
of empirical findings related to our main variables of interest. Lastly, we relate reported
findings to previous literature.
The reported signs of the coefficients allow for intuitive interpretation, i.e. a positive sign
indicates an increase in the likelihood of tax inversion. Similarly, a negative sign indicates a
decrease in the likelihood of tax inversion. Along with p-values we also report McFadden R2
values to validate the choice of model specification. Further, due to the non-continuous nature
of our dependent variables, i.e. the inversion dummy, we ensure robust standard errors by
using the Huber/White function in Eviews (Brooks, 2008). Between variable multicollinearity
is checked for by running a correlation matrix as presented in appendix (A7)
Empirical results; control variables
Before proceeding with results and analysis of our main variables of interest, we present
the main findings in Table 5 related to our control variables that are included to control for
effects that are already proven by the literature. For instance, cash position (Col, Liao &
Zeume, 2016) and leverage (Desai and Hines, 2002) are two commonly analyzed firm-
specific variables that are found to positively affect firms‘ decision to invert. We are not,
however, able to confirm such evidence. However, we do find that relative size, i.e. the value
of the transaction as a ratio of the market value of the inverting firm, is positively43
related to
firms‘ propensity to invert. Lastly, we report that pharmaceutical companies are more likely to
invert than are firms from other industries, which is consistent with previous literature (e.g. as
discussed by Sharife, 2016).
43
Which is, as mentioned in earlier sections, the opposite sign retrieved from the cross sectional CAAR
regressions.
39
Empirical results; main variables of interest
Before proceeding, Table 5 presents a summary of expected signs of our independent
variables compared to our findings. Expected signs are based on previous literature (see
Appendix 6: Variables; Section III: Theory and Hypothesis Development).
Foreign board members
Our first finding confirms our initial hypothesis that increased number of foreigners on
U.S. corporate boards increase firms‘ propensity to invert; our nationality-coefficient of
6.7665 is significant at a 5% level. Thereby, we are able to contribute to the very limited
amount of research on how foreign board members impact corporations‘ propensity to invert
and confirm issues brought up by legal scholars such as Mann (2004) and Yosifon (2015) that
patriotism could, potentially, lead to unwanted consequences for the United States (that is,
through loss of tax revenues). Hence, our results provide support to the notion that patriotism
on U.S. corporate boards may lead U.S. companies to focus more on managing earnings than
on ―patriotic duties‖ (Kate Barton, E&Y). Findings are also closely related to those reported
by Babkin, Glover & Levine (2015) who find that firms with higher ratio of foreign
institutional investors are more likely to invert than are firms with less foreign institutional
investors. Important to note, however, is that we are not able to solely isolate the effect of
patriotism on the decision to invert as there could be a variety of other reasons and motives
for why boards with high ratio of foreign board members decide to invert (e.g. see Masuli,
Wang & Xie (2012) and Miltekov, Poulsen & Wintoki (2013). On the other hand, by
Expected Realityβ-coefficient
(P-value)
% Foreign Board + +6.766507**
(0.0301)
CSR - --0.592230
(0.4332)
Entranchement - --1.481720
(0.2576)
Insider Ownership + --10.41771
(0.1161)
Institutional Ownership + +1.506618
(0.5657)
Significance: 1%=***, 5%=**, 10%=*
Table 5
Hypothesised Sign and Reality
40
including a control group of international cross border M&A transactions that are not tax
inversions, we indirectly remove the effect of foreigners‘ local expertize as a determinant of
cross border M&As as both our samples have this same feature. In other words, in our
findings we isolate an additional effect beyond local expertize that potentially could explain
why firms choose to invert.
Our results are also tested with additional robustness tests44
where we test our nationality-
coefficient with a number of different combinations of control variables. In fact, as board
nationality is our main focus in the logit regression, we have constructed our robustness test to
include the nationality coefficient in all model variations. The different model specifications
all generate consistent results with our main model.
Corporate social responsibility
When testing for CSR engagement we find a negative, yet insignificant, coefficient of -
1.48. Thus, we fail to prove any evidence that CSR effects the decision to invert. Thereby,
although the sign is in line with our initial hypothesis, we are unable to confirm previous
literature that CSR has a negative effect on the decision to engage in tax sheltering activities.
Our robustness test provides three additional variations of our main model, of which one
provides significant results.
Entrenchment
As stated earlier, we study the effect of staggered boards in order to explore whether
corporate entrenchment may be related to firms‘ propensity to invert. We fail to find any
significant evidence (p-value of 0.4332) whether entrenchment has any impact on firms‘
decision to invert and thereby we are not able to confirm our initial hypothesis. As with our
other main variables of interest, we run a number of additional modifications to our main
model to see whether other model variations may be better at capturing the effect of
entrenchment on firms‘ propensity to invert. Despite the same sign, the p-value does not
improve as we test additional model variations.
44
See Appendix A9
41
Insider ownership
According to previous literature (Desai & Dharmapala, 2006; Armstrong, Blouin &
Jagolinzer,2013) and our initial hypothesis, a high degree of insider ownership should have a
positive effect on a firm‘s decision to invert due the alignment of manager and shareholder
interest (Jensen, 1983). However, our findings are contrary to such reasoning. We find a
negative relationship between insider ownership and the decision to invert. Interestingly, the
p-value for the insider coefficient is just shy of showing significant results in our main model
specification, while proving highly negative and significant results in our robustness tests.
Hence, due to the significance of our two model variations we provide contrary results to our
initial hypothesis. These findings are not in line with results by Col, Laio & Zeume (2016)
and Armstrong, Blouin & Jagolinzer, Larcker (2013) that insider ownership is positively
related to firms‘ propensity to invert.
The contrary nature of our results may shed light on the existence, and importance, of firm-
specific reputational costs as a solution to the under sheltering puzzle, as discussed by
(Weisbach, 2001; Desai and Dharmpala, 2006; Gallemore, Maydew, Thornock, 2013). That
is, if management is in for the long-run, and assuming that increased equity ownership leads
to better alignment between shareholders and management, then our results points towards a
potential reality where managers with equity incentives do not believe that the financial
benefits from a tax inversion outweighs the potential costs associated with such transactions
(Section II; Related literature on tax inversions).
Institutional ownership
The model coefficient for institutional ownership is positive, yet insignificant. Hence, we
fail to find evidence in support of our initial hypothesis that high levels of institutional
ownership should lead to an increase in firms‘ propensity to invert. This way of reasoning is
inspired by Babkin, Glover & Levine (2015) and Bird & Karolyi (2015), but contradicts
findings reported by Khuruna & Moser (2012).
42
VI. Conclusion
Variables National CSR Staggered Insider Institutional
National6.766507**
(0.0301)
Staggered-1.481720
(0.2576)
CSR-0.592230
(0.4332)
Insider-10.41771
(0.1161)
Institutional1.506618
(0.5657)
Cash-2.517713
(0.5848)
-4.154384
(0.3738)
0.386650
(0.8817)
2.100807
(0.4617)
3.001297
(0.3781)
TobinsQ-0.295774
(0.1614)
-0.200119
(0.2909)
0.010251
(0.9358)
-0.042942
(0.7466)
-0.049438
(0.7063)
Size-1.83E-12
(0.8883)
5.22E-11
(0.5154)
4.74E-11
(0.3570)
4.16E-11
(0.3762)
5.46E-11
(0.3030)
DealSize12.11984***
(0.0072)
12.00159***
(0.0003)
4.971283***
(0.0000)
4.783263***
(0.0000)
4.688225***
(0.0000)
Leverage0.288895
(0.1300)
0.172790
(0.4968)
0.177013
(0.1542)
0.148631
(0.3147)
0.134026
(0.3870)
Industry_Pharma2.225538*
(0.0669)
2.724995**
(0.0363)
0.108250
(0.8760)
0.067321
(0.9242)
0.081780
(0.9109)
Constant-5.723985***
(0.0048)
-4.512838**
(0.0295)
-
2.266899***
(0.0009)
-2.176091***
(0.0006)
21.05243*
(0.0961)
McFadden R-Squared 0.680858 0.662641 0.551426 0.558387 0.543778
# observations 48 48 48 46 46
Significance: *=10%, **=5%, ***=1%
Table 6
Propensity to Invert: Multivariate Cross-Sectional Regression
The table below shows the results from our logit multivariate regressions, regressed on
Inversion that takes the value 1 for all tax inversions and 0 for all non-inversion cross-border
M&A's. We run five different univariate regressions on our five variable of interest; Board
Nationality, Staggered Board, CSR, Insider- and Institutional Ownership. We present the β-
coefficient for each variable and the P-values in parenthesis. QML (Huber/White) Standard
43
In this study, we provide empirical evidence for the market reaction to corporate tax
inversions and research a number of different board-related determinants of the inversion
decision. We find evidence that tax inversions create shareholder value for acquiring firms,
with significant and highly positive returns on the day of announcement. Hence, investors
seem to appreciate the future possible tax savings and other financial benefits that come with
such transactions. Further, we report that our post-2004 sample including inversions to well
governed countries outperforms inversion samples from earlier studies that are focused on
pre-2004 inversions where the majority of inversions were directed to ―tax havens‖ with low-
governance standards. Hence, although the U.S. Treasury aimed to lower the benefits of tax
inversions by adding additional regulation in 2004, corporations successfully found new ways
to invert.
In regards to our second hypothesis we are not able to draw any conclusion regarding how
firm-level ethical behavior impacts the decision to invert, measured as CSR reporting. The
reason for this may likely relate to the CSR variable itself as it might not be the most
appropriate variable to use when studying CSR. For instance, and as noted by Huseynov &
Klamm (2012), the CSR measure is broad in scope, hence using only one variable does not
capture its various dimensions. After all, CSR is a rather complex and diffuse concept that
includes a number of different aspects (Garriga & Mele, 2003).
The same reasoning might be applied to the variable institutional ownership as it might
include a rather broad scope of different institutional owners. Hence, to change the features of
our variable to gain better validity, we propose to investigate what types of institutional
investors are more or less likely to support the decision to invert. In particular, and inspired by
findings on institutional ownership and tax avoidance by Khuruna & Moser (2012), we
hypothesis that short-term oriented investors, such as hedge fund activists, are more likely to
pressure boards and managers to engage in tax inversions, while long-term oriented
institutional money is more interested in lowering the firm-specific reputational costs that
could destroy firm value in the long-run (Khuruna & Moser, 2012).
However, we do report novel findings that the number of foreigners on U.S. corporate
boards positively impacts firms‘ propensity to invert. These findings highlight statements
recently made by U.S. politicians and policy makers that lack of board-level patriotism is a
possible common theme for inverting firms. By assuming that board-level patriotism is
inversely related to one firm‘s reputational costs, we propose a possibility that foreign board
members have a superior ability to withstand public and social pressure resulting from tax
inversions, thereby increasing their propensity to invert. In fact, if this was true, this would be
44
of particular importance for policy makers as multi-national boardrooms may lead U.S.
corporations to shy away from patriotic duties and focus fully on shareholder value creation.
Further research could focus on optimizing the variable of patriotism in order to draw a
clearer connection to reputational costs. This could be done by using other methodologies,
including interviews, surveys, case studies as proposed by Graham, Hanlon & Shevlin (2012).
Finally, our paper contributes to the literature on the under-sheltering puzzle by proposing
new possible sources of reputational costs that has been partially left untouched by researches.
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49
VIII. Appendix
A1 Database description
Zephyr, Merger Market &
Capital IQ
Zephyr is used to find our population of tax inversions. This
database is an extensive database for M&A transactions
which has been used in earlier studied (e.g. Le Nadant &
Perdreau, 2006). Merger Market has been used in the same
way as Zephyr, mainly to identify different transactions and
characteristics of such firms. Merger Market is a platform
designed for the M&A sector and provides information
regarding transactions and the companies involved. Capital
IQ was used in a similar fashion.
SEC Edgar Edgar, the Electronic Data Gathering, Analysis, and
Retrieval system, performs automated collection of U.S. firm
financial reports. The database is free to use and is available
on the web. Edgar was used to cross-references the dates of
announcement from Merger Market and Zepyhyr.
Datastream and Eikon Datastream was used to collect our secondary data such as
equity prices Price (Adjusted – Default) and indexes S&P
500 Composite Price Index. We also used Datastream and
Eikon to obtain company specific.
A2 Inversion sample
When creating our novel datasets we searched for different criteria in Zephyr and Merger
Market.
Deal type: Acquisition & Merger
Geography: North America (Acquirer)
Deal value: min=300 mil EUR
Indices: S&P 500 (Acquirer)
Current deal status: Completed, Announced
The exact phrase: Tax Inversion
Time period: 2004/01/01 - Present
50
This procedure gave us a large initial sample of 202 transactions. Next, we manually
searched for our key control phrase “The deal is described as a tax inversion”. This gave us
our main sample of 54 identified tax inversions from 2004-2016.
We also excluded all non-listed companies as we require a stock price when conducting
our event study. We also adjusted our sample for our main criteria (see Section 4.1; Data
collection), that is, excluding non-merger inversions. Subsequently, we ended up with our
post-2004 merger inversion sample of 28 transactions.
A3 Peer group sample
We searched for different criteria to create our sample of reference firms.
Deal type: Acquisition & Merger
Geography: North America (Acquirer)
Deal value: min=300 mil EUR
Indices: S&P 500 (Acquirer)
Deal status: Completed, Announced
The exact phrase: Cross-border
Time period: 2004/01/01 - Present
This procedure gave us a sample of 678 cross-border M&A transactions. These
transactions are to the best of our ability manually matched with our sample of tax inversions.
The matching is based on several determinants including: Size of deal, Market value of
acquirer, Industry (NAICS code) and country of the target. We identified one transaction for
each inversion transaction in our main sample.
A4. OLS specification
3-day Event Window ( ;1, :1) + 1 +
5-day Event Window ( ;2, :2) + 1 +
7-day Event Window ( ;3, :3) + 1 +
11-day Event Window ( ;5, :5) + 1 +
3-Day Event Window ( ;1, :1) + 1 + 2 + 3 + + 5 +
6 + 7 + 8 + 9 + 1 +
11 + 12 +
5-Day Event Window ( ;2, :2) + 1 + 2 + 3 + + 5 +
51
6 + 7 + 8 + 9 + 1 +
11 + 12 +
7-Day Event Window ( ;3, :3) + 1 + 2 + 3 + + 5 +
6 + 7 + 8 + 9 + 1 +
11 + 12 +
11-Day Event Window ( ;5, :5) + 1 + 2 + 3 + + 5 +
6 + 7 + 8 + 9 + 1 +
11 + 12 +
A5 Logit specification
+ 1 + 2 + 3 + 4 + 5
+ 6 + 7 +
+ 1 + 2 + 3 + + 5
+ 6 + 7 +
+ 1 + 2 + 3 + 4 + 5
+ 6 + 7 +
+ 1 + 2 + 3 + 4 + 5
+ 6 + 7 +
+ 1 + 2 + 3 + 4 + 5
+ 6 + 7 +
A6 Variables
Variables of interest
D_Inversion Our main variable of interest is a dummy
variable which takes the value 1 if the
transaction is categorized as a tax inversion,
and 0 otherwise.
NAT Board Nationality is our novel variable of
share (%) of board members with a
nationality other than United States. For
more information in the creation of this
variable see A10.
INR Insider ownership is our third variable of
52
interest which is a discrete variable that
ranges from 0% to 100% of insider
ownership (source: Capital IQ).
STG Staggered board is a dummy that takes the
value 1 if staggered, and 0 otherwise
(source: Eikon)
INT Institutional Ownership is a discrete
variable from 0% to 100%. This variable
together with STG are widely accepted as a
good proxy for corporate control (Gompers,
Ishii & Metrick, 2003) (source: Capital IQ).
CSR We include a dummy for corporations
with CSR sustainability reporting in their
annual report. The dummy takes the value 1
if they conduct CSR reporting, otherwise 0
(source: Eikon)
( ; , : ) Our last variable of interest is our CAR
extracted from our event study. We use
different event windows throughout our
regressions.
Control variables
53
Size Hunter & Jagriani (2003) show that large
transactions give higher post-merger gains.
Moeller, Schlingemann & Stulz (2004) find the
opposite, smaller firms get higher merger gains.
In our OLS regressions, we include this
variable to control for the absolute value of the
deal size. Desai & Hines (2002) find that larger
firms are more likely to expatriate.
RelSize We also include a variable for the relative
size of the transaction (e.g. used by Asquith,
Brunner & Mullins, 1983; Gupta & Misra,
2007). This ratio is calculated as the market
value of the acquired firm / market value of the
acquiring firm.
Stake We Include a variable for the acquired stake
in the acquired company. Fuller, Netter &
Stegemoller (2002) show that the acquired
stake in a company affects the return to
shareholders of the acquiring company.
D_FinAdv Song et al. 2013 showed that financial
advisor has an impact on the deal outcome
especially in large cross-border transactions.
We specify this as a dummy which takes the
value 1 if the advisor is a ―bulge bracket‖
(Financial Times, 2016) Investment Bank, and
0 otherwise. This variable is supposed to
capture the experience of advisor and has been
used by e.g. Fuller, Netter & Stegemoller
(2002) and Haleblian & Finkelstein (1999).
D_Divers Doukas, Holmen & Travlos (2002) and
Flanagan (1996) show that markets react
negatively to diversifying M&A dels. We
include a dummy that takes the value 1 if it is in
54
the same industry and 0 otherwise.
Tobin‘s Q We include a measure of Tobin‘s Q. Lang,
Stulz & Walking (1991) find that having a low
Tobin‘s Q might stand for a poor quality of the
acquired company. We calculate Tobin‘s Q as
the total market value of equity / total assets.
I_Pharma We create a variable controlling for the
pharmaceutical industry, as several researchers
found pharmaceutical firms to be more likely to
invert (e.g. Kanavos & Angelis, 2014).
D_Nature A variable for the nature of the deal is
included. The variable takes the value 1 if it is a
recommended/friendly bid, and 0 if hostile.
Used by e.g. Tuch & O‘Sullivan (2007)
Leverage We include a variable for the leverage of the
bidding company. As researched in earlier
studies, Mueller (1980) finds that a higher
amount of leverage is a significant determinant
in M&A. Desai & Hines (2002) also find that
firms with large ratios of debt or more likely to
invert. 10 percent higher leverage ratios are
associated with 0.7 percent greater market
reactions to expatriations, reflecting the benefit
of avoiding the U.S. rules concerning interest
expense allocation. Our leverage variables is
calculated as net debt / total assets.
55
A7 Model validity
Breusch-Pagan
Correlation Matrix
Shapiro-Wilk Test
CAAR(-5,5) CAAR(-3,3) CAAR(-2,2) CAAR(-1,1)
W 0,931193 0,875381 0,920162 0,952399
p-value 0,005532 6,98E-05 0,002131 0,03972
alpha 0,05 0,05 0,05 0,05
normal no no no no
Regression of Weight on Height
ANOVA
df SS
Regression 1 2404,778
Residual 50 1682,311
Total 51 37767,09
Regression of e^2 on Height
ANOVA
df SS
Regression 1 93633,27
Residual 50 6658446
Total 51 6622479
SSE(Model1) 16782,31
n 52
SS(Reg*) 93633,27
X2(BP):Num 41816,64
X2(BP):Denom 5477,534
X2(BP) 9,01
Chisq(.95,1) 3,841
P-Value 0,003
SIZE STAKE ADVISOR I_PHARMA REL.SIZE TOBINSQ LEV1 DIVERS STAG CSR INSIDER INST NATIONAL Cash
SIZE 1,000000
STAKE 0,017166 1,000000
ADVISOR 0,090810 0,082982 1,000000
I_PHARMA 0,162857 0,148458 -0,157801 1,000000
REL.SIZE 0,110603 -0,138838 -0,036695 0,076168 1,000000
TOBINSQ -0,087374 -0,029244 -0,110292 0,389133 0,046556 1,000000
LEV1 -0,104630 -0,160973 0,077787 -0,218737 0,102365 -0,276710 1,000000
DIVERS -0,034842 -0,012577 0,175219 -0,257084 -0,144025 -0,112034 -0,033115 1,000000
STAG -0,117454 -0,097097 -0,098222 -0,096102 0,412367 0,010887 0,203836 0,058318 1,000000
CSR 0,208097 0,133849 0,110138 0,081969 -0,150894 0,169867 -0,248818 0,133333 0,007776 1,000000
INSIDER -0,083001 -0,039441 -0,429012 -0,067284 -0,035107 -0,164803 0,286945 -0,082579 -0,024549 -0,289902 1,000000
INST -0,082929 -0,100187 -0,318080 -0,030958 -0,079382 -0,148492 0,240993 -0,087631 0,004140 -0,184375 0,848956 1,000000
NATIONAL 0,002276 -0,037632 0,145345 -0,052933 -0,025389 0,070535 0,063645 0,071796 -0,085856 0,062806 -0,202944 -0,142929 1,000000
Cash -0,100992 0,065909 0,030881 -0,034155 0,229632 -0,034056 -0,258036 -0,071395 0,090743 -0,219894 0,026476 -0,084683 -0,022276 1,000000
56
Two-sample test: Mann Whitney
Dep. Var. U-stat N (Inversion) N (Peer) Mean Std Z-score
CAAR (1,-1) 472 26 26 338 54,64125 2,45236
CAAR (2,-2) 496 26 26 338 54,64125 2,891588
CAAR (3,-3) 494 26 26 338 54,64125 2,854986
CAAR (5,-5) 484 26 26 338 54,64125 2,671974
Appendix 3:
Two-sample test: Mann Whitney test
The table below presents statistics used to calculate Mann Whitney Z-scores for our CAAR
series. This test statistics is used due to the non-nornmality nature of our data series.
57
A8 Abnormal return: Descriptive statistics
Company Country Announcement Day Trading Days of Available Data -2 -1 0 -1 -2
Actavis Ireland 20-05-2013 131 -0,26% 0,90% 1,10% 2,08% 0,73%
Alkermes Ireland 09-05-2011 131 2,56% 2,11% 4,40% 4,37% 3,16%
Applied Materials Inc. Netherlands 24-09-2013 131 -0,13% 0,90% 8,96% 2,51% -0,90%
Argonaut Bermuda 14-03-2007 131 -1,26% -0,41% 9,25% -1,21% -1,30%
Arris Group UK 22-04-2015 131 0,75% 0,71% 19,77% -4,43% -1,67%
Burger King Canada 26-08-2014 131 1,18% 17,50% -4,47% -2,09% 3,27%
C&J Energy Services Bermuda 25-06-2014 131 -0,71% -2,08% 2,76% -0,05% 0,91%
Chiquita Brands Ireland 10-03-2014 131 0,34% 0,00% 10,45% 0,75% -2,58%
Eaton Ireland 21-05-2012 131 -0,32% 1,10% -3,07% 1,41% 0,42%
Endo International Ireland 05-11-2013 131 0,66% -1,84% 25,38% -0,60% 3,15%
Horizon Pharma Ireland 19-03-2014 131 3,68% 3,92% 8,12% 3,29% 2,31%
IHS Inc UK 21-03-2016 131 -0,18% -0,09% 9,73% 2,52% -2,43%
Jazz Pharmaceuticals Ireland 19-09-2011 131 -1,04% -2,44% 2,77% 6,57% 1,55%
Johnson Controls Ireland 25-01-2016 131 1,15% -1,13% -2,07% 1,42% 1,14%
Liberty Global UK 05-02-2013 131 2,27% -0,71% -3,21% -2,89% 3,01%
Livanova (Cyberonics) UK 26-02-2015 131 0,16% 1,08% 9,91% 2,98% 2,06%
Medtronic Ireland 15-06-2014 131 -0,08% -0,43% -1,20% 2,35% 2,85%
Mylan Netherlands 14-08-2014 131 1,77% -1,21% 1,43% 2,01% -1,58%
Pentair Ltd. Ireland 28-09-2012 131 0,97% 1,35% 14,71% 2,03% 0,61%
Perrigo Ireland 29-07-2013 131 1,54% 1,24% -6,87% 0,70% -1,55%
Pfizer Ireland 23-11-2015 131 -3,00% -0,74% 3,63% -1,22% -0,30%
Steris UK 13-10-2014 131 1,75% -0,83% 1,97% -3,01% 0,68%
Stratasys Israel 16-04-2012 131 1,93% 2,18% 13,56% 0,80% 2,52%
Terex Finland 11-08-2015 131 0,31% -0,13% 3,34% 4,18% -0,90%
Tower Group Bermuda 05-08-2008 131 2,37% 0,56% -7,15% -1,88% -4,16%
Wright Medical Netherlands 27-10-2014 131 1,30% -1,89% 0,15% 1,76% 1,73%
0,68% 0,75% 4,74% 0,94% 0,49%
Industry
Pharmaceuticals 0,75% -0,01% 4,23% 1,77% 1,23%
Industrials 0,66% 0,37% 7,20% 1,99% 0,28%
Insurrance 0,55% 0,07% 1,05% -1,55% -2,73%
Food 0,76% 8,75% 2,99% -0,67% 0,35%
Energy -0,71% -2,08% 2,76% -0,05% 0,91%
Data 0,87% 1,04% 11,65% 1,66% 0,04%
Telecom 0,75% 0,71% 19,77% -4,43% -1,67%
Country
Ireland (12) 0,52% 0,34% 4,78% 1,93% 0,96%
Netherlands (3) 0,98% -0,73% 3,51% 2,09% -0,25%
Bermuda (3) 0,13% -0,64% 1,62% -1,05% -1,51%
UK (5) 0,48% 0,09% 8,03% 0,08% 0,30%
Canada (1) 1,18% 17,50% -4,47% -2,09% 3,27%
Finland (1) 0,31% -0,13% 3,34% 4,18% -0,90%
Israel (1) 1,93% 2,18% 13,56% 0,80% 2,52%
A8 Table 1
Abnormal Returns Period
Overall Average
Industry Average
Abnormal Return Over Five Day Period for S ingel-Company Inversion
58
Company Country Announcement Day Trading Days of Available Data -2 -1 0 -1 -2
AbbVie Inc UK 18-07-2014 131 -0,24% 1,47% 1,05% -1,36% -0,66%
Honeywell International Inc Germany 28-07-2014 131 -0,28% -0,45% 1,09% 0,45% -0,16%
Alcoa Inc Belgium 26-06-2014 131 -1,40% -0,30% 2,60% -0,52% -0,42%
ADM Canada 14-07-2006 131 2,99% -15,20% -7,64% 1,55% 3,02%
Johnson & Johnson (Crucell) UK 20-06-2010 131 0,26% 0,90% 0,71% 0,12% -0,24%
Danaher Corporation UK 15-09-2015 131 0,40% 0,24% -0,19% 0,38% 1,38%
Johnson and Johnson (Sythes) Netherlands 27-04-2015 131 0,20% 0,89% 0,68% -0,42% 0,45%
Cisco Systems Inc UK 15-03-2012 131 0,01% -0,04% -2,09% 0,44% 0,09%
Ball Corporations UK 19-02-2015 131 -0,87% 3,68% -4,30% -1,44% 0,79%
Marriott International Inc UK 14-03-2015 131 -0,51% 0,56% 0,55% 1,17% -0,45%
Schlumberger Limited UK 20-01-2015 131 4,44% 0,33% -0,94% 1,80% -1,85%
McKesson Corp. UK 24-10-2013 131 0,10% 0,88% 4,28% 2,71% -1,41%
Abbott Laboratories UK 15-12-2004 131 2,93% -7,71% -3,18% 5,65% 1,19%
Mohawk Industries Inc Canada 04-07-2015 131 -0,97% -0,60% 5,34% -1,05% 1,05%
Abbott (Solvay) Switzerland 28-09-2008 131 1,89% 0,92% 2,32% 1,10% 0,80%
Apache UK 20-07-2012 131 -1,09% 1,20% -0,53% 0,07% -0,04%
Amgen Inc Germany 16-09-2015 131 -0,90% -1,01% -1,84% 2,13% 0,05%
Alexion Pharms Netherlands 28-11-201 131 -0,35% 3,16% -0,27% -1,08% 0,71%
Aon Corp. Switzerland 22-08-2008 131 -0,47% -0,54% 1,43% 0,29% 1,06%
Zoetis Inc. UK 02-11-2015 131 0,58% -0,70% 1,63% 5,02% 0,25%
SPX Corp. (Clyde Union) Germany 26-04-2014 131 0,52% -1,28% -1,29% -3,25% 4,41%
Monsanto Belgium 31-03-2008 131 0,41% 1,77% -3,71% -4,62% -1,00%
Cephalon (delisted) Netherlands 05-12-2005 131 -0,69% 0,13% -0,73% -1,05% 2,00%
Arthur J. Gallagher Russia 03-09-2013 131 -0,03% -0,27% 2,37% 0,33% 0,27%
Equinix UK 29-05-2015 131 0,15% -0,27% 0,15% 0,46% -0,44%
Constellation brands Norway 03-04-2006 131 -2,38% 0,31% 0,66% 2,23% -0,24%
0,18% -0,46% -0,07% 0,43% 0,41%
Industry
Pharmaceuticals 0,38% 0,08% 0,06% 0,72% 0,29%
Industrials 0,28% -2,77% -1,36% -0,75% 1,82%
Insurrance -0,03% -0,27% 2,37% 0,33% 0,27%
Food -1,45% 0,43% 0,61% 1,70% -0,35%
Energy 1,67% 0,77% -0,74% 0,93% -0,95%
Data 0,52% -1,28% -1,29% -3,25% 4,41%
Telecom -0,41% -0,20% 0,22% 0,13% -0,26%
Country
UK (12) 0,51% 0,05% -0,24% 1,25% -0,12%
Germany (3) -0,22% -0,92% -0,68% -0,22% 1,43%
Belgium (2) -0,50% 0,73% -0,56% -2,57% -0,71%
Canada (2) 1,01% -7,90% -1,15% 0,25% 2,03%
Netherlands (3) -0,28% 1,39% -0,11% -0,85% 1,05%
Switzerland (2) 0,71% 0,19% 1,87% 0,70% 0,93%
Russia (1) -0,03% -0,27% 2,37% 0,33% 0,27%
Norway (1) -2,38% 0,31% 0,66% 2,23% -0,24%
A8 Table 2
Abnormal Return Over Five Day Period for S ingel-Company Cross-Border M&A
Abnormal Returns Period
Overall Average
Industry Average
59
A9 Robustness Tests
Variables 1 2 3 4
National21.05243**
(0.0464)
18.99830*
(0.0842)
11.82146***
(0.0007)
7.433992**
(0.0144)
Staggered-1.677272
(0.5036)
-1.197306
(0.4473)
-0.938060
(0.7684)
-1.243042
(0.6979)
CSR-7.959840**
(0.0402)
-7.165145
(0.1509)
-2.659779
(0.1253)
Insider-52.77711*
(0.0685)
-51.34791*
(0.0975)
Institutional1.546100
(0.8134)
Cash-19.08227
(0.5585)
-21.51185
(0.3409)
-4.603815
(0.4622)
-2.804245
(0.5051)
TobinsQ-0.624834
(0.1727)
-0.524467
(0.2822)
-0.288543
(0.3537)
-0.212652
(0.4453)
Size7.03E-11
(0.5503)
7.58E-11
(0.4790)
5.11E-11
(0.4947)
2.87E-13
(0.9817)
RelSize27.76475**
(0.0485)
25.94213
(0.1297)
15.28375***
(0.0006)
12.02089***
(0.0025)
Leverage-0.193921
(0.7356)
-0.244459
(0.5409)
0.162322
(0.5711)
0.350003
(0.1080)
Industry_Pharma8.052749*
(0.0628)
7.445560
(0.1580)
3.782780**
(0.0161)
2.221784
(0.1012)
Constant-7.160631
(0.2041)
-5.436986*
(0.0842)
-5.893391***
(0.0093)
-5.799763**
(0.0144)
McFadden R-Squared 0.767099 0.766783 0.713925 0.689134
# observations 46 46 48 48
Significance: *=10%, **=5%, ***=1%
Robustness
Propensity to Invert: Multivaraite Cross-Sectional Regression
The table below shows the results from our logit multivariate regressions, regressed on
Inversion that takes the value 1 for all tax inversions and 0 for all non-inversion cross-
border M&A's. We present the β-coefficient for each variable and the P-values in
parenthesis. QML (Huber/White) Standard errors & covariances are used.
60
A10 Description of our novel variable: Board nationality
A description of how we created % of Board of Directors as non U.S. nationals; this data was
created manually by identifying the current or past Board of Directors at the time of inversion. The
name‘s where then cross-references either by the database NNDB.com, the information provided from
the direct source (I.e. homepage of the corporation) or finally we identified the University under-
graduate studies in order to identify non-U.S. nationals. These estimates might include biases and be
partly inadequate. However, we believe that most of our predictions are correct and sufficient to draw
statistical conclusions.
Company Announcement Day Country of Target
Actavis 20-05-2013 Ireland 0,00%
Alkermes 09-05-2011 Ireland 14,29%
Applied Materials Inc. 24-09-2013 Netherlands 8,33%
Argonaut 14-03-2007 Bermuda 0,00%
Arris Group 22-04-2015 UK 0,00%
Burger King 26-08-2014 Canada 75,00%
C&J Energy Services 25-06-2014 Bermuda 0,00%
Chiquita Brands 10-03-2014 Ireland 0,00%
Eaton 21-05-2012 Ireland 0,00%
Endo International 05-11-2013 Ireland 25,00%
Horizon Pharma 19-03-2014 Ireland 28,57%
IHS Inc 21-03-2016 UK 27,27%
Jazz Pharmaceuticals 19-09-2011 Ireland 11,11%
Johnson Controls 25-01-2016 Ireland 20,00%
Liberty Global 05-02-2013 UK 10,00%
Livanova (Cyberonics) 26-02-2015 UK 12,50%
Medtronic 15-06-2014 Ireland 15,38%
Mylan 14-08-2014 Netherlands 8,33%
Pentair Ltd. 28-09-2012 Ireland 20,00%
Perrigo 29-07-2013 Ireland 18,18%
Pfizer 23-11-2015 Ireland 7,69%
Steris 13-10-2014 UK 0,00%
Stratasys 16-04-2012 Israel 0,00%
Terex 11-08-2015 Finland 11,11%
Tower Group 05-08-2008 Bermuda 0,00%
Wright Medical 27-10-2014 Netherlands 11,11%
Overall Average
12,46%
Industry Industry Average
Pharmaceuticals 12,68%
Industrials 16,11%
Insurrance 0,00%
Food 37,50%
Energy 0,00%
Data 13,64%
Telecom 0,00%
Board of Directors
Descriptive Statistics for Singel-Company Inversion
61
Company Announcement Day Country of Target
AbbVie Inc 18-07-2014 UK 11,11%
Honeywell International Inc 28-07-2014 Germany 7,69%
Alcoa Inc 26-06-2014 Belgium 0,00%
ADM 14-07-2006 Canada 0,00%
Johnson & Johnson (Crucell) 20-06-2010 UK 30,77%
Danaher Corporation 15-09-2015 UK 11,11%
Johnson and Johnson (Sythes) 27-04-2015 Netherlands 8,33%
Cisco Systems Inc 15-03-2012 UK 15,38%
Ball Corporations 19-02-2015 UK 8,33%
Marriott International Inc 14-03-2015 UK 0,00%
Schlumberger Limited 20-01-2015 UK 9,09%
McKesson Corp. 24-10-2013 UK 0,00%
Abbott Laboratories 15-12-2004 UK 0,00%
Mohawk Industries Inc 04-07-2015 Canada 0,00%
Abbott (Solvay) 28-09-2008 Schwitzerland 0,00%
Apache 20-07-2012 UK 0,00%
Amgen Inc 16-09-2015 Germany 18,18%
Alexion Pharms 28-11-201 Netherlands 9,09%
Aon Corp. 22-08-2008 Schwitzerland 8,33%
Zoetis Inc. 02-11-2015 UK 0,00%
SPX Corp. (Clyde Union) 26-04-2014 Germany 0,00%
Monsanto 31-03-2008 Belgium 0,00%
Cephalon (delisted) 05-12-2005 Netherlands 18,18%
Arthur J. Gallagher 03-09-2013 Russia 63,64%
Equinix 29-05-2015 UK 0,00%
Constellation brands 03-04-2006 Norway 22,22%
Overall Average
9,29%
Industry Industry Average
Pharmaceuticals 8,90%
Industrials 3,21%
Insurrance 63,64%
Food 11,11%
Energy 4,55%
Data 0,00%
Telecom 5,13%
Board of Directors
Descriptive Statistics for Singel-Company M&A (Peer Group)