Corporate governance and returns to emerging economy firm acquisitions in tax havens: An empirical test on Indian firms

Abstract

Cross-border acquisitions (CBAs) by emerging economy firms are known to yield positive stockholder returns. A nontrivial fraction of CBAs by emerging economy firms are in tax havens. We argue because of weak corporate governance in emerging economies and the secrecy afforded by tax havens, emerging economy firm CBAs in tax havens yield lower stockholder returns than their CBAs in nontax havens. We also argue the negative effect of tax haven destinations is greater for firms with greater business group ownership and for firms with greater foreign insider ownership. Furthermore, we argue the negative effect of tax haven destinations is mitigated for firms whose stock is actively traded in the market. Empirical tests in a sample of nearly 800 CBAs by Indian firms from 2002 to 2011 support our hypotheses. Our study contributes to a better understanding of stockholder returns to CBAs by emerging economy firms and the influence of corporate governance on these returns. K E Y W O R D Scorporate governance, cross-border acquisitions, emerging economy firms, tax havens

Profit-shifting behaviour of emerging multinationals from India

“…There could be a self-selection aspect here. While there has been examination of location decision in OFCs (Chari and Dixit 2020;Das and Banik 2015;Vineeth and Nidheesh 2021), future studies could examine the parent firm and country-specific drivers of the decision to establish direct and/or via-OFC subsidiaries, which will throw further light on multinational behaviour. Similarly, via-OFC subsidiaries were further classified on the basis of export intensity of the multinational firm.…”

“…Previous research documents that cross-border acquisition by emerging economy firms in tax havens yields lower stockholder returns than similar acquisitions in non-tax havens (Chari and Dixit 2020). Despite lower returns, emerging economy firms are found to have a substantial presence in tax havens through the establishment (or acquisition) of subsidiaries.…”

Board Capital and Firm Performance

“…To sustain the firms during the financial crisis, firms adopt short-term strategies with bad management practices [9]. These bad management practices resulting from ineffective monitoring of managerial discretion are the causes of weak corporate governance in firms [10].…”

Tax provisioning by extractive industry multinational subsidiaries

“…Further, the offshore financial centres' (OFC) linkage of subsidiaries could shape tax provision in host countries due to profit-shifting activities. Previous research suggests that OFCs are the preferred destination for outward investment by Indian multinationals (Das and Banik 2015;Chari and Acikgoz 2016;Vineeth and Nidheesh 2021) despite a low return from such investments (Chari and Dixit 2020). The incorporation of OFC entities in the oil and gas sector is considered to be an indicator of corruption risk in cross-country sample (Marcolongo and Zambiasi 2022).…”