Expectations and Expatriations: A Long-Run Event Study

This paper represents the first event study of corporate expatriations since Desai and Hines (2002), and is the first study to link corporate expatriation behavior to intangibles. Utilizing a bootstrap methodology, the paper demonstrates that corporate expatriation inversions generated statistically and economically significant excess returns on the order of 225% above market returns in the years following the inversion. Notwithstanding the public nature of the inversion announcement, which should have been a signal of extraordinary future profits, there was historically no price response to the signal, which provided corporate managers with a reduced tax cost, since the capital gains tax on the transaction is based upon market price. After providing evidence on the abnormal profits associated with inversion transactions and controlling for industry and the standard market risk factors, the paper provides the first evidence of a strong and significant correlation between excess returns to inversion transactions and revenue growth attributable to intangibles in non-U.S. subsidiaries in the years following the inversion transaction.