Corporate Tax Inversions and Reputational Costs - A Study on Board-Level Patriotism and the Decision to Expatriate

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.