Contributions published at Corporate Finance Theory (Michel Habib)

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The current debate on profit shifting and tax planning structures of multinational enterprises (MNEs) has reached new heights and has caught attention from media, governments, and the general public. This thesis gives a comprehensive overview on profit shifting techniques of MNEs. To illustrate the theoretical concepts, a practical example based on Google's tax planning structure is discussed. Further, the thesis provides insights into the current Base Erosion and Profit Shifting (BEPS) project initiated by the Organization for Economic Co-operation and Development (OECD), focusing on transfer pricing legislation and the arm's length principle. In addition, an empirical analysis is performed observing 8,726 affiliates across Europe from 2007 to 2016. The analysis provides evidence for profit shifting activities of MNEs. Furthermore, the estimation model includes an interaction term to measure the effectiveness of transfer pricing legislation. The results show a limiting effect of both, transfer pricing documentation requirements and specific transfer pricing penalties. The documentation requirement interaction term is not significant. However, the penalty coefficient indicates a reduction of around 35% when specific transfer pricing penalties are introduced and is significant at the 5% level. This is considerably important to understand the limiting effect on shifting activities. Nonetheless, further research is needed to monitor the effectiveness of the OECD Action Plan and the prevention of BEPS, especially with regards to developing countries.

According to valuations of real estate experts, the global real estate market is the largest asset class in the world. Residential real estate represents the largest store of wealth for individuals, whereas commercial real estate serves as space for retail, offices and manufacturing, while at the same time creating jobs, and hence, contributing largely to the economic growth. Real estate investors are attracted by high and stable total returns accruing from rental income conjunct with the lower levels of volatility compared to investments in equities and bonds. This paper focuses on indirect investments into real estate enabled by real estate investment trusts (REIT) and real estate funds (REF) by focusing specifically on two countries – Luxembourg and Switzerland. Luxembourg is currently one of the largest centers for REF creation in Europe in terms of both the number of funds established and the total capitalization of its REF market. Swiss REF market is only half its size. In order to identify the reasons for Luxembourg’s attractiveness in this space, this paper takes a deep dive into the regulatory requirements for REF formation and daily business activities, examines in detail the applicable fiscal treatment in both countries and presents the risk and return analysis of the largest REFs in Switzerland over the last five years.

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Taxes are necessary for the good functioning of the society, as they are an important source of finance for governments. Thus, the tax compliance is essential to make sure that people and businesses comply correctly with the tax laws of their country. Furthermore, demands of regulators have also been growing because of the difference financial scandals that happened. The digitalization of our world has disrupted many sectors including the tax compliance. Indeed, it can count now on the emergence of new technologies such as the RPA to help reaching its objective. Indeed, robots simplify the work of tax preparers by taking care of their tedious tasks and allow them to focus on the more interesting part of their work. Other technological advances made over the years also display some valuable advantages for the tax compliance such as their speed and accuracy. Nevertheless, the emergence of new technologies started rising some ethical points. Indeed, robots perform better than humans and also can considerably reduce the cost of companies. Therefore, there are seen as a treat for people’s job. Additionally, the fact that role of machines have increased over the years also has been pointed out as they take now some important decisions having significant consequences if not taken correctly.

This report is a preliminary research that could provide guidance to companies on the possible modernization for the different tasks using data of their corporate tax function. Firstly, the corporate tax function is defined, then the technologies are presented and then crossed to identify their potential benefits and drawbacks on the basis of literature search and interviews with professionals. Solutions are proposed that bring improvements such as efficiency or minimization of problems. Finally, the paper highlights the evolutive role of the corporate tax function towards the digitalization of its tasks. ERP and RPA, when combined, appear ideal to increase the overall efficiency of tax treatment and to avoid new problems. Moreover, this combination is easy to implement.

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In recent times mergers and acquisitions (M&A) have been a central topic for businesses, financial institutions and academic research. Lately, the number and the stake of the deals have constantly increased. The pharmaceutical sector is one of the main actors boosting this growth. After having reviewed major theoretical aspects involved in M&A, this thesis focuses on the abnormal returns generated by announcements of acquisitions in the pharmaceutical sector. For investigating this matter, the event study methodology is applied on a sample composed of over 100 transactions made between 2010 and 2015. Results show significant abnormal returns in different time windows, which one can conclude that an announcement creates, on average, positive returns for the acquirer’s shareholders once the takeover is made public.

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This paper studies on company stock return performance of Chinese buyers engaged in cross border M&A, based on the 155 collected cross border deals during 2012.01-2016.12 conducted by Chinese companies listed in Shanghai, Shenzhen, Hong Kong, Singapore, New York, Nasdaq, and London stock exchange market. Study shows that, on whole scale, the cumulative average abnormal return for 155 stocks are positive and statistic significant, meaning cross border acquisition exerts positive and significant wealth effect on Chinese acquirers in terms of stock return. To be more specific, transactions in which buyer companies have smaller size, targets in similar culture area (greater China) with Chinese buyers, and no control gained on targets tend to exert significant positive effect on company stock returns during event window. For some large companies, study result shows that it is not beneficial for shareholders if their companies focus too much on oversea expanding strategy, because a series of oversea M&A is very consumable for buyers which could lead to various risk such as operation risk and financing risk, and increasing risk and uncertainty will damage company’s performance in stock market. Thus, big company should not to be overconfident while be more careful to control oversea expanding risk. On the other hand, for M&A transactions in different cultural area, Chinese buyers should pay attention to communication skill and efficiency in merger process, and treat cultural integration as their priority in post-merger integration Finally, control gained is not always a good signal in stock market, since gaining control from developing market companies normally do not bring good corporate system to targets. However, the gain on control usually means a large consideration payment, which lead to increasing financial burden, as well as more problems in post-acquisition integration.

The United Kingdom is in the midst of change. When Great Britain decided to leave the European Union on June 24, 2016 there was great uncertainty about the consequences. The relationship of the United Kingdom with the EU had some starting difficulties. A globally oriented policy with an independent state has been essential for the United Kingdom until today. An increasingly Eurosceptic view established itself over the recent years and the pressure for a referendum on the EU membership was omnipresent. In this bachelor thesis the author sets the focus on the banking industry. It is the author’s objective to examine recent events leading up to the Brexit and defining its impact on the value of the so called passporting rights. The passporting rights allow every member of the European Economic Area (EEA) to establish a business or to provide services within this zone. This can be done easily and inexpensive. Therefore, being a member of the European Union is of great interest for companies inside this industry. However, with the opt-out of the European Union the passporting rights are jeopardized to be lost by many institutions. Appropriate alternatives have not been determined by now, but the final solution is expected to be much less efficient and practical. Furthermore, it is very likely that many countries will not be covered the same as in the past. Eleven British banks that are listed on the London Stock Exchange were considered in this study. Almost half of them have business in Europe, whereas the other half is focused in the UK. One bank, namely BGEO Group only operates in Georgia. We expect that Standard Chartered should be negatively affected by the UK referendum negotiations. The reason is that they have been using passports in the past but did not establish regular businesses in the European Union. Standard Chartered would face more challenges should the use of passports be limited in the future. HSBC should also be negatively affected as a result of having the biggest EU revenue of all the examined banks. We used the common event study methodology based on Delaloye, Habib and Ziegler [2005] to assess the value of the passporting rights. We evaluate the impact of 19 events preceding the UK referendum on bank stock prices. The 19 events happened over a period of 3 years, starting with the announcement of Prime Minister David Cameron to hold a referendum and to renegotiate UK membership terms in 2013. We use a market regression for every bank with a lagging, current and leading market index as well as a dummy variable which takes on the value 1 on event days. The lagging and leading market index shall prevent biases of nonsynchronous trading. This set of equations is estimated with a seemingly unrelated regression. The dummy variable gives us the abnormal return. Event 1, when the referendum result was announced, is highly significant for 10 of the 11 banks. This led to positive abnormal returns for HSBC and STAN, whereas negative abnormal returns were obtained for the other banks. The banks that have their business mainly in the UK were affected the most by the referendum result. Additionally, there were some other significant abnormal returns for HSBC and Standard Chartered. The effect overall events were not significant for any bank. We further analysed the cumulative abnormal return (CAR). They reflect the sum of the abnormal returns over all event days. These were considerable. The difference in the highest CAR and the lowest CAR should give us more insight. They reflect the range of the most optimistic view on the UK referendum of the market participants and the most negative view on the UK referendum of the market participants. This CAR difference was significant for the Bank of Ireland and Standard Chartered. There are various explanation for these results. Event one can be explained that the market did not see the result of the referendum coming and reacted very heavily. Especially banks that focus on the UK market were affected negatively, because of the uncertainty and possible downturn that the UK could experience. The exit of the European Union will change several things including the regulation, for better or for worse. The conclusion of our analysis is that the value of the bank passport for the listed British banks is limited. There is probably a value for Standard Chartered, because they had significant results in many statistics. The other banks are more affected by the consequences for the UK home market and not by the loss of the passporting rights. The following years will be critical for the financial sector. The upcoming negotiations will show, if the UK can profit from a deregulation and access to the EU or the hurdle for financial business will be bigger.

Environmental pollution due to improper waste management is becoming a global issue. One of the main consequence is the ocean plastic pollution which is mainly due to land plastic leakage. At the current rate the amount of plastic debris will reach over 250 million metric tons by 2025. The sources of this plastic comes from all over the world but the 5 worst countries in terms of ocean plastic pollution are located in Asia. On this list Indonesia ranks second and is responsible for the addition of 0.5 to 1.20 million metric tons per year. Indonesia recognized the importance of improving their waste management system back in 2008 with the implementation of the new waste management law 18/2008. After an overview of the actual state of the waste management in Indonesia in terms of technological advancement, its legal and institutional environment as well as the financing behind it, this paper uses a statistical model serving the main objectives. The first is to identify the different factors influencing the amount of uncontrolled urban waste (urban waste not collected or not properly disposed of) in Indonesia and in five different sub-regions within the country. In a second time the same model is adapted in order to be able to assess the statistical significance of the implementation of the amount of uncontrolled urban waste of the new waste management law 18/2008 almost 10 years after its implementation. The main objectives of the waste law are also analysed in order to identify if those objectives have been met or not and the reasoning behind the different findings. The first analysis showed that one of the most important factors in terms of waste increase is the urban population increase. In addition, it allowed to identifying that PET plastic bottles are rather well recycled and are not a main driver of uncontrolled urban waste which is a surprising and encouraging finding. The second analysis showed that the waste law 18/2008 did not have a statistically significant impact on the reduction of uncontrolled urban waste. Nevertheless, a decreasing trend can be observed and different encouraging actions and improvements have already taken place. In the third chapter of the paper different new waste management technologies are presented with their individual suitability for the specificities of the Indonesian waste management system as well as the importance of higher interest in plastic recycling facilities. In addition, one of the findings is also that one of the reasons of the low performance of the new waste law 18/2008 is the lack of financial resources to properly implement sustainable waste management facilities. Furthermore, the most important factor is raising awareness about the consequences of non-proper waste management system on land as well as in the oceans. The need of changing the population’s habits in terms of waste generation and disposal is key to a more sustainable waste management industry in Indonesia.

This paper presents four real estate valuation methods – intrinsic value method, hedonic property value method, discounted cash flows method and income capitalization method – with their strengths and weaknesses and their usefulness. Real estate valuations are important today as prices on the Swiss real estate market are extremely high and a reversal trend can have an important impact on property owners. To obtain a fair market value for a property is thus essential for all market players. A benchmark study has been performed on the difference between the transaction price and the appraised price to determine which method is more accurate than the others to valuate residential properties – multi-family houses, single-family houses and condominiums. The data comes from a Swiss real estate institute named IAZI. Two main results are found. First, the discounted cash flows method is the more suited to valuate multi-family houses. It is the less biased method when compared to the capitalization and the hedonic methods. Secondly, the hedonic method is the more suited to valuate single-family houses and condominiums compared to the intrinsic method. The hedonic and discounted cash flows methods are the more used in Switzerland and the ones required by the banks to grant mortgage loans.

In the aftermath of the financial crisis, many financial institutions were forced to rethink the asset allocation of their investment portfolios, the interest rate paid on cash and similar investments approaching the zero bound and sometimes even below zero for some currencies like the Swiss franc or the Japanese yen. Pension funds accounting for a large part of the assets held in the financial system, were also forced to follow this trend in order to preserve their returns on investment without engaging in reckless risk taking. However, as per the traditional theory of finance, more return also implies more risk. The Swiss franc having reached negative territories since 2015, the Swiss Occupational Pension Funds also needed to shift their asset allocation form cash and similar to riskier and potentially more illiquid assets. Real Estate being one of the main asset class composing the asset allocation of pension funds, it was potentially a designated candidate for an allocation increase, shifting asset away from cash and similar investments into RE. However, other asset classes were also considered by pension funds’ asset managers, such as Foreign Equities and Alternative Investments. The aim of this thesis is to analyze the potential effects of the negative interest rates policies on the allocation to Real Estate (and possibly other illiquid asset classes) by global pension funds and more specifically the Swiss Occupational Pension Funds.

This thesis investigates the effect of taxes on firms’ leverage ratio. Corporate taxes as a signifi-cant determinant of firms’ capital structure choices have been well documented in many empiri-cal studies. This thesis implements studies among firms that listed on the Swiss stock exchange over the period of 2000-2015 using the difference in differences model. A significant asymmet-ric reaction of leverage is found in the testing result. There is only a significant positive correla-tion between leverage ratio and tax increase. Swiss listed firms increase their leverage ratio by 306 basis points on average by increasing corporate income tax of 1%. However, the leverage ratio is not affected by a tax decrease. This result is consistent with the dynamic tradeoff theory.

This thesis builds an approach to measure the influence of wealth losses, that the sellers of a private company suffer, on the choice of how to exit said company to the public markets. The choices analysed in this model are initial public offerings and trade sales to public companies that took place between 2004 and 2015. The effect of the wealth losses is examined by testing for a selection bias in a model predicting wealth losses for each exit method. A Tobit-5 model was chosen for this task. The selection bias can be shown to be significant for the initial public offerings in this sample. Due to a small sample size the effect could not be shown for the respective trade sales.

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Entrepreneurship is a key driver of our economy. Startups create jobs, increase productivity and generate wealth. Even though the importance of entrepreneurship is beyond a doubt, the research conducted about it is rather sparse. One would expect that Switzerland, as one of the most innovative countries in the world, would also be one of the top entrepreneurial countries. Studies, however, show that Switzerland has not been able to establish itself as a major startup hub worldwide. The main objective of this thesis is to find out more about the Swiss startup ecosystem. The analysis focuses on four important pillars of the ecosys-tem: entrepreneurs and startups, industry clusters, success factors and startup investors. This paper analyses 2’083 startups that were founded between 2000 and 2015. The data includes information about the startups, their founders and investment received. Addition-ally, a survey with Swiss startup investors was conducted to gain insight into their invest-ment behaviour. Some of the most interesting results of this thesis include that entrepre-neurs in Switzerland are significantly older than in other countries, Life Science and ICT are the two predominant industries for Swiss startups and that universities play an im-portant role in entrepreneurship. This research needs to be complemented by further studies as there are many influences and aspects of the ecosystem that are not covered by this thesis.

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