Burcin Col

Corporate governance and state expropriation risk

Recent studies show that the transfer of corporate governance structure across borders has significant valuation consequences. It is equally important to consider the valuation effect of state expropriation risk as well as its interaction with quality of corporate governance. Using a sample of cross-border acquisitions during 1989–2009, we find that targets, which operate under some degree of state expropriation risk, receive a significantly lower premium. The target shareholders are not fully rewarded for the improvement in firm governance since the benefits of improvement are mitigated under predation. Our results provide evidence for twin-agency theory of Stulz (2005) through cross-border mergers.

Agency Costs of Moving to Tax Havens: Evidence from Cross‐Border Merger Premia

Research Question/Issue This paper explores the valuation effects of the tradeoff between tax avoidance and corporate governance through tax haven M&As. Firms can achieve tax savings by selling to an acquirer based in a tax haven, making the newly created multinational a haven resident. Changing a firms tax home through a 100% acquisition is also accompanied by a change in legal system and corporate governance. Therefore, tax savings could come at the expense of corporate governance degradation making the value implications of such tax avoidance attempts an important empirical issue. Research Findings/Insights Using an international sample of cross-border M&As from 1989-2012, we find value evidence supporting the agency costs hypothesis. For 100% M&As, a lower target premium is associated with those transactions where the tax haven acquirer has weaker investor protection than the target. Theoretical/Academic Implications Our findings provide value evidence regarding the agency costs of tax motivated M&As as a result of the secrecy laws and limited investor protection of tax havens. Practitioner/Policy Implications This study provides a perspective for executives of multinational firms to take into account the value consequences associated with secrecy laws and weak investor protection while considering a possible relocation to tax havens. It also offers further insight to policy makers concerning the costs of limited investor protection and lack of transparency.

Foreign Risk - Domestic Problem: Capital Allocation and Performance under Political Instability

We argue that firms with foreign operations misallocate capital and underperform when they face political instability abroad. We develop and test a dynamic model of firm capital allocation under foreign political instability. The model shows that as a political regime becomes less stable, independently of whether the regime becomes less business-friendly or more business-friendly, firms invest sub-optimally (firms either over-invest or under-invest), and their marginal qs diverge further from an optimal level. Using elections and textual analysis of local media during national elections, we construct a novel index of political instability. We find that U.S. firms and industries with a greater exposure to election-induced political instability experience disruptions of investment efficiency which lead to lower valuations and lower Total Factor Productivity. Therefore, international trade is a significant conduit of foreign political instability into U.S. markets.

What Drives Corporate Inversions? International Evidence

We study tax and non-tax incentives for corporate inversions in a hand-collected dataset of 691 inversions out of 11 home countries into 45 host destinations over the 1996-2013 period. Even though lower tax rates generally attract inversions, only two in five firms invert into tax havens and two thirds of firms invert into host destinations with lower statutory tax rates than those faced at home. Moreover, firms invert to geographically close destinations with similar governance standards. Using staggered country-pair level policy changes as experiments, we find that host-country governance may explain why not all firms invert.

Foreign Risk - Domestic Problem: Trade, Capital Allocation, and PerformanceUnder Political Uncertainty

We argue that international trade is a significant conduit of foreign political uncertainty into U.S. markets. We find that industries that export considerable shares of their output to countries with high political risk or countries that hold national elections in a given year experience lower total factor productivity growth, lower valuation, and worse accounting performance. The key channel of political uncertainty transmission is disruption of investment efficiency. Our results are not driven by economic risk or the quality of institutional environment of trading-partner countries, and they remain robust when we account for potential endogeneity of export flows.

Foreign Risk - Domestic Problem: Trade, Politics, and Capital Allocation

We argue that international trade is a significant conduit of foreign political uncertainty into U.S. markets. We find that industries that export considerable shares of their output to countries with high political risk or countries that hold national elections in a given year experience suboptimal investment efficiency, slower total factor productivity growth, lower valuation, and worse accounting performance. Our results are not driven by economic risk or the quality of institutional environment of trading-partner countries, and they remain robust when we account for potential endogeneity of export flows.