LONG-TERM PERFORMANCE OF CORPORATE INVERSIONS SINCE 2004

Open Access
Author:
Diacont, Samuel Harvey
Area of Honors:
Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • J. Randall Woolridge, Thesis Supervisor
  • Brian Davis, Honors Advisor
Keywords:
  • Tax Avoidance
  • Corporate Inversion
  • Finance
  • Stock Returns
  • Long-term Performance
  • Section 7874
Abstract:
This paper conducts a study on the short and long-term equity performance of companies that have underwent corporate inversion since Section 7874, which considerably redefined the mechanisms of inversion. Prior studies have concluded only mixed market reaction to the announcement of inversion, on average, despite evidence that these transactions result in long- term effective tax rate reductions. Because equity prices should immediately correct for any changes in long-term expectations, one would expect the market to react positively to the announcements. Meanwhile, a concurrent study by Elizabeth Chorvat has identified that pre- 2004 inversions have created statistically and economically significant long-term outperformance. Many of the cost associated with inversion, especially post-2004 inversion, are difficult to accurately define. The continued prevalence of inversion, coupled with the enigmatic nature of inversions costs, suggests more recent inversions may also be mispriced. Utilizing a Fama and French 5 Factor Model, this study identifies -4.47% of average long-term annualized abnormal returns for companies that have underwent inversion since 2004. Coupled with both the positive market reaction to post-2004 inversion announcements and Chorvat’s findings, this suggests that the market may initially underestimate the costs of inversion associated with Section 7874 at the time of announcement.