The Value of International Income-Shifting Opportunities to U.S. Multinational Firms

We examine the value of firms’ opportunities to reduce their corporate tax burden by shifting income from high- to low-tax jurisdictions. Prior literature shows that firms do engage in tax-motivated cross-jurisdictional income shifting; however, the contribution of such shifting to firm value has not been examined or quantified. We develop and validate a new measure of U.S. multinational firms’ tax-motivated income shifting opportunities. Using this measure, we find that income shifting opportunities are associated with a discount on firm value of 2.2 to 3.7 percent for a standard deviation increase in income shifting opportunities. We also find a positive association between changes in income shifting and returns that reverses in future periods, consistent with investors not immediately understanding the value consequences of income shifting. These negative value consequences are greater for firms with more intangible asset generating activities, consistent with tax-motivated income shifting opportunities facilitating managerial rent extraction, creating myopic investment behavior, or subjecting firms to significant compliance, regulatory, or reputational costs. Ultimately, we find evidence supporting the view that income shifting opportunities reduce firm value by increasing myopic investment behavior.