Discussion of What Drives Corporate Inversions? International Evidence Burcin Col, Rose Liao, & Stefan Zeume Discussed by Colleen Honigsberg 1 1

Overview This paper provides important evidence on the question of whether corporate inversions are in shareholders’ best interests. First, the authors undergo a substantial data collection process and identify 691 inversions from 1996-2013. Second, the authors provide strong descriptive evidence that tax policy drives corporate inversions, and that firms generally invert into jurisdictions with similar country-level governance measures. Finally, based on their tax and country governance findings, the authors conclude that inversions are likely in the best interests of shareholders. 2

Theoretical Background This very interesting question could be highlighted by more theoretical development. Traditional economic models say that value gained from tax avoidance transfers directly to shareholders—i.e., shareholders reap the benefits of the government’s loss. This led many to question why firms do not engage in more extensive tax-sheltering. However, recent work has questioned the assumption that shareholders are the primary beneficiaries of tax avoidance, noting that several costs can arise from such behavior. Some major costs could include increased opportunities for management to extract rents through tax shelters (e.g., Dynegy), loss of value-enhancing laws, reputation costs, and exposure to risk of sanctions. More recent work has suggested that shareholders of well-governed firms can better realize the benefits of tax avoidance because well-governed firms will be less susceptible to, for example, managerial diversion costs. 3

Contribution Building on this theoretical background would allow the paper to make an even stronger contribution. First, is the proper research question whether inversions benefit shareholders? Or is it whether (or when) shareholders reap the greatest benefits from this form of tax planning? Broadening the paper in this manner would help the reader to identify exactly what the paper brings to the literature. Second, what proportion of the benefits do shareholders actually receive? Cross-sectional differences showing when shareholder value is greatest would be both interesting and policy-relevant. Third, what are the greatest costs associated with inversions? Descriptive results highlighting the important costs would be helpful. E.g., a cross-country analysis showing how markets/revenues respond to tax rate changes. 4

Research Design (1/2) Especially given that the paper is largely descriptive, some relatively minor changes could have significant benefits. Matched Sample. The authors match inverted firms to control firms by country, 2-digit SIC code, and size prior to each inversion. Why not match based on determinants of inversions found in prior literature? Firm Operations. The authors would benefit from controlling for firm operations. In what countries does the firm operate? Where are its physical assets located? Income base? International operations could affect both the country-governance results and the geography results. Country-specific Factors. Additional country-specific factors such as the presence of a territorial tax system are often thought to drive inversions. The U.K. and Japan have recently switched to territorial systems. Does such behavior change the pattern of inversions? 5

Research Design (2/2) Further institutional detail on DTTs and TIEAs would help the reader to understand the potential endogeneity of these events. The authors state that their strongest evidence that tax policy and country-level governance drive inversions comes from two quasi-natural experiments: the adoption of Double Taxation Treaties (DTT) and the passage of Tax Information Exchange Agreements (TIEA). What drives the decision to adopt a DTT and/or pass a TIEA? 6

Outcomes of Inversions (1/2) Although at the end of the paper, I thought the results on the outcomes of inversion were very interesting! The authors find that institutional ownership generally increases upon inversion, but that such ownership decreases when firms invert into countries with weak country-level governance. Concentrated ownership around the world has often been attributed to weak investor protection, so the decrease in ownership is not obvious. This led me to several questions: When institutional ownership decreases, what increases? Managerial ownership? Retail ownership? Can firms mitigate the loss of institutional investors through strong firm governance? 7

Outcomes of Inversions (2/2) Consistent with the changes in institutional ownership, I wondered whether there are other changes in firm governance. Although the authors focus on country-level governance, the institutional investor findings suggest that it would be worth also examining firm-level governance. Are there other changes in firm governance? Managerial turnover? CEO characteristics? What happens to stock performance? Both upon the announcement of the inversion and long-term? Are there cross sectional differences in market response and/or performance for firms with differing governance structures? Upon relocating to lower-tax jurisdictions, are there changes in earnings management? Do tax avoidance strategies decrease? 8

Minor Comments This is an early paper, but it could be even more helpful to future researchers if a few minor points were clarified. Why do different tables use different time periods? Is country-governance a “motive” for inversions? Or do companies decide to invert for, say, tax reasons and then select a countries with similar governance? The sample contains corporate inversions of firms out of the 11 countries that contain the most acquisitive firms from 1990-2007. Why these 11 countries specifically? Is there reason to think focusing on these countries limits the generalizability of the findings? Why does the choice of mergers vs. reorganization matter? What is the underlying theory for focusing on this choice? Has this been affected by changes in public policy (e.g., American Jobs Creation Act of 2004)? More detail on industry would be helpful, as the popular press seems to suggest that inversions are concentrated in certain industries. Why not use CapIQ entirely rather than Datastream so that the data all comes from the same source? 9

Discussion of What Drives Corporate Inversions? International Evidence Burcin Col, Rose Liao, & Stefan Zeume Discussed by Colleen Honigsberg 10 10