Carnegie Mellon University

Brent Glover

July 01, 2017

When It Comes to Corporate Inversions, Some Shareholders are Better Off Than Others

For every regulation issued by the government, one can often find a corporation seeking a way to circumvent the new law. And that principle begets a second truth: Regulations often carry unintended consequences.

Both premises are neatly illustrated in a forthcoming paper coauthored by Brent Glover, assistant professor of finance, who examined the impact of corporate inversions — and the laws designed to discourage them — on a company’s shareholders.

The paper, “Are Corporate Inversions Good for Shareholders?” (with Anton Babkin and Oliver Levine, both at the University of Wisconsin), has been accepted for publication by the Journal of Financial Economics. It studies 60 corporate inversions — in which a company reduces its tax burden by acquiring a foreign company and redomiciling overseas — by U.S. public companies during the past 20 years, and focuses on the impact of a law that requires stockholders to pay capital gains taxes at the time of the inversion.

The changes are meant to discourage companies from completing an inversion to avoid the United States’ 35 percent corporate tax.

According to Glover’s research, the personal taxes associated with an inversion can make the transaction wealth-destroying for 15–20 percent of the company’s shareholders. Long-term shareholders, who have experienced greater share price appreciation, face a larger tax burden.

Consequently, a small group of shareholders winds up shouldering a heavier tax burden to allow everyone to benefit from lower corporate taxes in the future created via the inversion.

“When we’re teaching students, we might think about conflicts between debt holders and equity holders. But typically we think of all equity holders as being on the same page,” Glover said. “But with an inversion, some of the company’s shareholders benefit while others are made worse off. There’s a transfer of wealth from taxable shareholders to tax-exempt shareholders within the company.”

In some cases, the inequity has caused an outcry among investors. Such was the case with medical technology giant Medtronic, whose $49.9 billion acquisition of Dublin-based Covidien slapped shareholders with a hefty tax bill.

Glover said the research illustrates how uncertainty in economic policy can wind up causing collateral damage. He continues to work on other problems related to corporate inversions, such as how cash trapped abroad would affect U.S. investment if that money were repatriated. While this issue is the subject of much political crosstalk, Glover believes it is ripe for quantitative analysis.

“Most of my research is combining models and data,” he said. “At the end of the day, the allocation or misallocation of capital and resources is, as economists, what we worry about.