Investors don’t necessarily benefit when firms move their headquarters offshore, suggests a new study led by Art Durnev at the University of Iowa. Looking at two types of multinational offshore firms — those with headquarters registered in offshore financial centers and those with subsidiaries set up in OFCs — between 1998 and 2007, the researchers found that firms with subsidiaries in OFCs enjoy an 11% higher valuation over onshore companies, while firms with directly registered headquarters in OFCs are valued 14% lower than onshore companies. Although firms with offshore headquarters have much lower official average corporate tax rates (11.5%) than firms with offshore subsidiaries (36.5%), the authors argue that these tax savings may be offset by costs arising from OFCs’ confidential policies and complex legal structures, which create more opacity for investors. A firm’s HQ location leads to information asymmetry between management and financial markets, negatively affecting firm value, the authors say.

(Source: Journal of Corporate Finance)

Published in Dawn, Business & Finance weekly, February 8th, 2016