Are Corporate Inversions Good for Stakeholders?

Brent Glover, Tepper School Associate Professor of Finance, speaks about his research on corporate inversions.

Video Transcript

A corporate inversion is when a U.S. company changes its domicile for tax purposes. Traditionally, this occurred as a U.S. company that had a parent in the United States and a subsidiary abroad inverting its corporate structures such that the subsidiary becomes the parent and vice versa. That's where the name comes from.

The media coverage in large part has highlighted the benefits for companies, which is a reduction in the corporate taxes that they're paying. But an inversion also has costs, and we study in particular costs that fall on the shareholders of the firm. And so the paper's looking at this. So we go and get data on U.S. companies that have inverted since the 1990s and then we write down a model to try to weigh these costs and benefits.

And we find that, actually, an inversion can hurt many shareholders. So U.S. taxable shareholders we find, on average, are losing from these deals, meaning that the capital gains tax that they pay is greater than the benefits of the reduced corporate taxes that they're getting. And so you can think about this as a net negative return or a wealth destruction for these shareholders.

Now lower tax entities or shareholders — so endowments, pension funds, other institutions that are not paying any capital gains tax, that are not subject to those taxes — an inversion looks like a great deal for them. They get all the benefits of a reduced corporate tax but they're not paying any of the capital gains costs. And so in our view, you can think about an inversion as this cross transfer of wealth from the taxable shareholders of the firm to tax-exempt entities.

Companies that have, say, a founder CEO, so think about Mark Zuckerberg and Facebook — for Mark Zuckerberg personally, it'd be a disaster. So we wrote an op-ed on this recently and you can do a back of the envelope calculation and it would suggest that Mark Zuckerberg would owe something like $13 billion in taxes personally if Facebook underwent this inversion. And so for a lot of these companies that are founder owned in large part — think about Google, think about Facebook, think about these companies where the CEO is a founder and has a large portion of the shares and a low basis — they started with basically basis at zero. It looks like a terrible deal for the company to invert and those are the companies we don't see entertaining these deals.