Contributions in Merlin

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After the turn of the century, the United States of America remained as one of the only developed countries which taxes corporations based on the so-called worldwide approach. The rationale of this tax regime is to tax the worldwide economic activity of a company. Thus, American companies with subsidiaries outside the United States are liable twice on their income created in those entities: First in the country in which the subsidiary is domiciled and secondly in the United States. A nexus of rules and tax treaties govern the taxation of these entities and usually the American parent company can deduct taxes already paid in foreign jurisdictions and therefore mitigate this problem of double taxation. However, as the United States has one of the highest tax in the developed world, the secondary taxation of the funds earned in other jurisdictions is often substantial. Because the taxation of those earnings can be postponed until the funds are repatriated in form of dividends to the U.S. parent company, many chose to retain their foreign earnings in off-shore jurisdictions or invested the funds in growth projects abroad. Postponing the repatriation of those funds indefinitely is obviously not a desirable solution as the parent company may need these funds or wants to distribute them to their shareholders. To do that while avoiding secondary taxation by the U.S. tax authorities some firms discovered a loophole in the legislation allowing them to effectively move their company domicile to a foreign country. These restructurings are called inversions as the companies structured is basically turned upside down. The main benefit is the avoidance of taxation on earnings from outside the United States. After several changes to the tax code most possibilities to invert were prohibited. However, exploiting an exception rule in the legislation a new wave of inversions occurred between 2004 and 2016. The method used was to merge with a smaller foreign competitor and move the domicile of the newly combined firm to the target company’s jurisdiction. Although the merging partner had to be at least a quarter of the acquirer’s size the method was widely used, especially in the healthcare sector. This study’s objective is, apart from providing the historical context and legal ramifications surrounding inversions, to measure the expectation of shareholders to the announcement of inversion mergers. The effect on the stock price’s abnormal return during the period in question was measured both in absolute terms and in comparison to a group of comparable transactions. The returns were calculated for the acquiring and target firms separately and combined. As an additional thesis an examination of the dependency between the target company’s return and the acquirers relative size was conducted as well. The method used to measure the expected value creation was to conduct an event study of the firm’s stock price returns during the period in which the merger was announced. The model chosen to estimate normal returns is the single-factor market model. The necessary estimation period during which a linear regression is used to calculate the stocks ordinary dependency to the market is set at 200 days. The relevant event window is defined as beginning two days before the announcement to two days thereafter. This is done to account for a possible run-up due to insider trading and to allow for a dragging reaction after the announcement. Only transactions with sufficient and undistorted data of both, the acquirer and the target company, were included. The comparable transactions were chosen based on industry, timing, absolute and relative size (to each other). Cross border were preferred to domestic mergers. The event studies show highly significant (0.1% level) combined cumulative abnormal returns (CAR) to the announcement of inversion mergers and the control group. Nevertheless, with a combined abnormal return of around 12.8% show inversions a significantly stronger performance than the control group sample which averaged a return of 3.3%. This can be interpreted as proof of additional value creation by inversion mergers based on their tax savings. The acquirer’s individual results expose the main reason for the gap between the two groups: While inversions average a highly significant CAR of 10% the control group’s acquirer display a loss of 1.8% during the announcement period. This loss is significant at the 5% level. Inverting firms are therefore clearly able to retain some of the value creation to their shareholders while ordinary acquisitions are regarded much more skeptical by the investing community. The value destruction to the acquiring shareholders is not certain but possible. The target returns differ less but with inversions averaging 15.6% and the control group 6.7% the discrepancy is highly significant nonetheless. This implies that targets are able to obtain some of the gains achieved through the tax savings. The positive returns of target companies are generally no surprise as premiums offered to facilitate such mergers are common. The abnormal returns of targets are subject of a further hypothesis which stated that the abnormal return should tend to be greater the smaller the company is in comparison to its acquirer. The rationale is that bigger tax savings should increase an acquirer’s willingness to pay and a small size may also reduce the relevance a possible overpayment would have on its shareholders. Indeed, a regression test shows a positive correlation between the relative size of the acquirer and the targets CAR during the announcement period. The estimated slope is significant at the 5% level while the intercept is non-significant. In conclusion it can be stated that inversions are perceived to create additional value to both involved parties and the tax savings seem to be regarded as a collective good shared among the two entities. However, thanks to major changes to the U.S. tax code at the end of 2017 inversions are likely to disappear for the time being.

We study how investors in a conservative Muslim society react to announcements of bank loans depending on their compliance with Shari’a law. We hand-collect 173 announcements of bank loans granted to listed corporations in Saudi Arabia, assess their issuance and estimate the reaction of the borrowing firms‘ stocks. We find that loans that are not Shari’a compliant are larger and are granted to larger firms. Controlling for firm and loan characteristics commonly present in other loan announcement studies, we further document that equity market investors react negatively to non-compliant loan announcements with the two-day cumulative abnormal return preceding the announcement up to 1.8 percentage points lower for the smaller non-compliant loans.

We show that the optimal asset allocation for an investor depends crucially on the decision theory with which the investor is modeled. For the same market data and the same client data different theories lead to different portfolios. The market data we consider is standard asset allocation data. The client data is determined by a standard risk profiling question and the theories we apply are mean–variance analysis, expected utility analysis and cumulative prospect theory. For testing the robustness of our results, we carry out the comparisons for alternative data sets and also for variants of the risk profiling question.