One in four global public firms uses tax havens to shelter funds – and among on the largest 1,000 global companies that number increases to three in four. And assets held in offshore tax havens among S&P 500 firms total US$2.4 trillion.
These numbers form the basis of a new research paper linking offshore tax haven use and shareholder value. In “The Value of Offshore Secrets: Evidence from the Panama Papers,” authors James O’Donovan, Hannes F. Wagner, and Stefan Zeume draw on data from the 11.5 million leaked documents belonging to Panamian law firm, Mossack Fonseca.
The paper will be presented at the 2017 Northern Finance Association Conference, which is being held in Halifax, Nova Scotia from September 15-17.
The authors find that the leak erased $135 billion in market capitalization among 397 public firms using offshore vehicles exposed in the leak. Firms using offshore vehicles were doing so to finance corruption and to aggressively avoid taxes.
And while those companies might be using offshore vehicles to increase firm value, boosting profits through bribery and tax avoidance, they are also using shelters to expropriate shareholders.
The question for shareholders, then: is this kind of firm value that you want to encourage?
Using data from firms implicated in the Panama Papers scandal, the authors find the biggest decline in firm value post-leak came from companies exposed to perceptively corrupt countries or firms that are particularly tax aggressive.
This appears to indicate that firms using offshore tax havens have some governance issues.
As the authors find:
This suggests that offshore vehicles are used to finance corruption and to aggressively reduce taxes, which, on its own, creates firm value. Firms implicated in the leak consequently show reduced economic activity in perceptively corrupt countries and less tax aggressive behavior. However, some of the benefits of using offshore shelters are offset by diversion of firm resources by insiders, who appear to take advantage of the deliberately opaque structures that offshore vehicles create.
You can read and download the full paper here.