Connie D. Weaver

Firm Valuation Effects of the Expatriation of U.S. Corporations to Tax Haven Countries

As a direct response to the recent trend in corporate expatriations, politicians have questioned the patriotism of firms that reorganize outside the U.S. and introduced numerous legislative proposals designed to prevent corporate expatriations. The implicit assumption made in proposing this legislation is that the expatriation trend is just beginning and that many more firms will follow suit to reduce their U.S. tax burdens. In this study, we investigate whether the share prices of expatriating firms react positively to initial announcements of intentions to expatriate to tax haven countries. Overall, we do not detect obvious shareholder benefits from expatriations. We analyze the statistical significance of each firms abnormal returns around the inversion announcement date using approximate randomization procedures. Specifically, we find that seven of the 19 single-company expatriations have significant negative announcement period returns and only two show significant positive returns. The remaining ten inversions show no statistically significant market reaction. The average return in the announcement period across all 19 firms is negative, but not significantly different than zero. Further, there is no consistent evidence of positive post-announcement returns. One policy implication of these results is that existing costs of expatriating might be sufficient to dissuade future expatriation without additional tax rule restrictions. At the very least, the track record of prior expatriations in failing to create substantial shareholder value might buy Congress some time to thoughtfully consider any legislative action that might be necessary. Because alternative avenues exist for firms to avoid, or at least substantially defer, U.S. tax on foreign income, a more comprehensive review of U.S. tax rules governing the taxation of foreign income may be needed.

The Extent of Implicit Taxes at the Corporate Level and the Effect of TRA86

We examine the extent of implicit taxes at the corporate level and the effect on implicit taxes of the Tax Reform Act of 1986 (TRA86). Using a variety of specifications, we find consistent evidence that implicit taxes eliminate virtually all of the cross-sectional differences in explicit tax preferences prior to TRA86, and then abruptly decline and eliminate only about one-third of the cross-sectional differences in tax preferences in years following TRA86. We triangulate this evidence that implicit taxes declined following TRA86 by also providing evidence (a) of a decline in the relation between changes in tax preferences and changes in pre-tax returns, (b) of an increase in the persistence of tax-related earnings changes, (c) that these dramatic economic changes are priced by investors. Finally, we provide evidence suggesting that the decline in implicit taxes after TRA86 is driven at least in part by expansion of aggressive tax planning and use of tax shelters. Taken together these results indicate that TRA86 had a profound and lasting effect on implicit taxes at the corporate level.

Flexible Business Models and Firms’ Financial Reporting Practices

In this study, we examine whether the flexibility in a firm’s business model (i.e., the way in which the firm manages and deploys its resources) is associated with its financial reporting practices. Recent survey evidence suggests that executives view firms’ business models as a key determinant of earnings quality. The premise underlying this study is that firms with relatively more flexible business models are more likely to achieve financial reporting objectives by taking advantage of their operational and financing flexibility rather than through accrual-based earnings management. We draw on prior research to identify attributes that are associated with flexible business models and develop a within industry, within year composite measure of the flexibility of a firm’s business model. After validating the measure, we use it to test our predictions. We find that firms with flexible business models are more likely to meet or beat analysts’ consensus forecasts, but are associated with lower discretionary accruals and a lower likelihood of financial restatements. In addition, we find that flexible business model firms are significantly more likely to use stock repurchases (but not discretionary accruals) to achieve important earning benchmarks. We contribute to the literature by highlighting that firms with flexible business models are able to exploit their operational and financing flexibility (in lieu of accrual manipulation) to meet financial reporting objectives.