Name and shame? Evidence from the European Union tax haven blacklist
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Name and shame? Evidence from the European Union tax haven blacklist Aija Rusina1
© The Author(s) 2020
Abstract I study publication of the European Union (EU) tax haven blacklist on December 5, 2017, to examine whether and how the use of recognized tax havens affects firm value. I find that the tax haven naming and shaming by the EU was associated with a negative stock price reaction of firms with tax haven subsidiaries. Overall, publication of the blacklist erased $56 billion in market capitalization among the implicated firms. The largest reaction was for those tax havens, for which it was not foreseeable that they would be included in the blacklist. Retail firms experienced a larger decrease in share price than firms in other industries, which is consistent with a potential consumer backlash. Also more tax-aggressive firms faced more negative returns, which suggests that investors expect firms might be audited or fined for past or overly aggressive tax avoidance. The negative reaction was less pronounced in countries with low levels of investor protection and weakly governed firms with substantial conflicts of interest between principals and shareholders. This is consistent with increased scrutiny and potential for countermeasures associated with the blacklist, which reduce opportunities for managerial wealth diversion. Keywords Blacklisting · Event study · Governance · Tax avoidance · Tax haven JEL Classification G12 · G32 · G38 · H25 · H26
* Aija Rusina [email protected] 1
Department of Business and Management Science and Norwegian Center for Taxation (NoCeT), NHH Norwegian School of Economics, Bergen, Norway
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A. Rusina
1 Introduction After months of screening of global tax policies, on December 5, 2017, the European Union (EU) finance ministers blacklisted 17 countries for refusing to cooperate with the EU’s decade-long crackdown on tax havens.1 The EU referred to the blacklist as list of non-cooperative tax jurisdictions, since the listed countries failed to make sufficient commitments in response to the EU’s concerns. Large media sites, including the Financial Times, the Guardian, Thomson Reuters, among others, provided news coverage on the first-ever EU blacklist, naming and shaming tax havens. Before the blacklist was published, the public was unaware of the countries featuring in the list and the potential EU sanctions. On the blacklist publication day, it was revealed that, beyond being named, countries face few consequences for being blacklisted.2 Since the blacklist does not have specific sanctions or financial penalties attached to it, it has been criticized as an insufficient response to the scale of tax evasion worldwide. Alex Cobham, the director of research at the Tax Justice Network (2017), commented that “tax avoiders and the countries that sponsor them will all be letting out a sigh of relief today.” In this study, I examine the effect that publication of the EU tax haven blacklist had on share prices of firms with subsidiaries in the blacklisted countries.
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