Public shaming is a costly affair for corporations
Corporations that invest in the tax havens blacklisted by the EU are penalised in the stock market. This shaming leads to weaker share prices.
About a year ago –and for the first time– the EU made its tax haven blacklist public, containing countries that, in the ministers for finance's view, do not do enough to combat global tax evasion.
In the article 'Name and shame? Evidence from the European Union tax haven blacklist', I analysed how publishing the list impacted the share price of listed multinational corporations with subsidiaries in the tax havens in question.
I found out that the investors reacted negatively and moved their capital out of companies that were involved in the blacklisted countries.
Listed multinational corporations with at least one subsidiary in tax havens saw a significant reduction in company value, compared to the corporations without any associated businesses in tax havens. The market reaction depends on how heavily the corporation has invested in the tax havens. An average corporation has around four associated subsidiaries in tax havens and saw a reduction of 2.5 per cent in company value after the blacklist was published. The corporations with more than 50 subsidiaries in tax havens saw a reduction of 3.7 per cent of their value.
Why does public shaming create this effect?
These corporations are facing a real risk of future EU sanctions. Financing projects that involve entities in the blacklisted jurisdictions can moreover become subject to auditing and assessment. This might threaten the corporations' tax-cutting strategies or lead to future audits.
Investors react negatively to such information, because the corporations' future profits are likely to fall. It indicates that investors expect corporations to be audited or fined for previous tax evasions or an overly aggressive tax evasion. Since the tax-cutting strategies through the use of tax havens are most relevant to corporations with a more aggressive tax-plan, they would subsequently have been more negatively impacted if the tax havens had to limit their preferential treatment. Investors react negatively to the publication because the corporations' future corporation tax is likely to increase.
The reactions among consumers are also important. When a company is blacklisted, we react negatively to the fact that it did not take its corporate social responsibility seriously. Other studies have shown that the corporations in retail trade are those that are punished the hardest for being unethical, or not taking their corporate social responsibility seriously, because the consumers can decide to boycott the corporation's products. My study confirms this: Retail trade corporations are more negatively impacted after the publication of the blacklist than companies in other sectors.
Starbucks in 2012
This happened to Starbucks in 2012, after it was discovered that the company had not paid any corporation tax since its establishment in the UK. The corporation had sent its proceeds abroad to a Dutch subsidiary. It resulted in a boycott by its consumers, leading to a decrease in the company's proceeds in 2012 and 2013.
Before the blacklist was made public, the market was unaware of which countries were on the list. Neither were the sanctions the EU could impose in the public domain. The same day as the 'name and shame' overview was published, we also learned that the blacklist does not include any specific pertaining sanctions or financial penalties. This has been criticised as an insufficient response to the scope of tax evasion on a global basis.
Despite a lack of sanctions or penalties, corporations were financially penalised. What I am not certain of, is whether this exposure actually leads to improvement in the corporations' tax strategies and contributes to less tax evasion going forward.