Corporate inversion generates significant tax benefits, Olin study finds

But researchers warn costs of inversion, such as fewer dividends to shareholders, must be completely understood

Corporate tax inversions — reincorporating overseas by transferring assets to a smaller company in a country where the corporate tax rate is lower — have become quite popular with American companies lately, forcing the Treasury Department to issue new rules aimed at curbing them.


The benefit of changing a firm’s home base to lower its effective tax rate is obvious. However, the costs of inversion are not well understood.

A recent study from Olin Business School at Washington University in St. Louis finds that American companies with foreign incorporation do have lower effective tax rates, higher cash balance, lower dividend payout and fewer stock repurchases.

“Overall, our study documents significant tax benefits to inversion,” said Radhakrishnan (Radha) Gopalan, PhD, associate professor of finance at Olin.

But there’s a downside to inversion too, Gopalan and his fellow researchers found. Past studies have shown that greater intensity and quality of market analysis contributes to higher profits. Overseas companies in general are followed less regularly by market analysts and these companies tend to have lower stock liquidity. In turn, the market appears to put a lower value on the cash on the firm’s balance sheet.

The study, “Corporate Inversions and Americanizations: A Case of Having the Cake and Eating it Too?” is co-authored by Armando Gomes, PhD, associate professor of finance at Olin, and Felipe Cortes, PhD, of Northwestern University. It appears on the Social Sciences Research Network website.

Return on investment is one area that must be monitored closely in an inversion.

“Firms with foreign incorporation had more cash on their balance sheet and paid less dividends than U.S. firms,” Gopalan said.

“Going into the study, we believed one of the advantages of inversion was the ability to return cash to shareholders without any repatriation tax,” he said. “Our results showed that on average, foreign incorporated firms did not return more cash to shareholders.

“We believe this could partly be because the inverted firms are discounted by the market due to fears about the corporate law in their new country of incorporation, and, in anticipation, the firms may be retaining more cash.”

The researchers however, don’t see an immediate end to the recent swell of inversions.

“While we document some costs in terms of lower stock market
valuation from foreign incorporation, for established firms that don’t
anticipate raising equity capital from the market, the cost may be
limited,” Gopalan said. “So, we do think that the number of inversions
may continue.