In recent months, legislators, finance ministers and international organizations have bashed multinational enterprises for tax minimization. Last November, the chairman of the UK Parliament's Public Accounts Committee accused Google, Starbucks and Amazon of "immoral" tax planning. In May, Senator Carl Levin blasted Apple's tax "gimmick" of "claiming to be tax resident nowhere." Just last month, the OECD warned that "[multinationals] may face significant reputational risk if their effective tax rate is viewed as being too low."
We presume that the goal of this public shaming is to hit multinationals where they live: their reputation and share price. If consumers are horrified by the brazen attempts of companies like Apple to increase shareholder value by reducing their effective tax rates, surely they will vote with their wallets and stop buying their products and services. Alternatively, if multinationals really do face significant reputational risk as a result of their tax strategies, their cost of capital should go up as investors incorporate this increased risk into their risk-return calculations. Either way, the share prices of these companies should suffer as a result of the dip in expected profits. Multinationals will then rush to reverse the slide by becoming "good" corporate citizens and voluntarily paying their "fair share" of taxes.
Investors don't care
Investors aren't buying it. Our preliminary research, which focuses on investor reaction to Apple Inc.'s congressional grilling, indicates that investors reacted to the shocking details of Apple's tax minimization with a collective yawn.
Using an event study approach, common in economics and finance research, we examined the impact of the May hearings on Apple's share price. We estimated the historical relationship between Apple's stock price and the S&P 500 during the 250 trading days prior to news that CEO Tim Cook would testify at the Senate hearing. We assumed that investor reaction, if any, would begin with this news and continue through the conclusion of the hearings. In other words, investors would react as soon as they learned of the Senate committee's intention to interrogate Apple executives, and would refine their trading behavior (either by buying or selling Apple stock) as the hearings progressed.
We then tracked returns to Apple's share price during the "event window," the four trading days beginning with news of Cook's impending testimony and ending with the conclusion of the hearing. We subtracted those changes in the share price that reflected Apple's historical relationship with the stock market and measured what, if any, difference remained. If investors took a dim view of Apple's tax practices, either because they anticipated a reputation risk-driven increase in its cost of capital, or because they predicted that consumers would stop buying Apple products in protest, then Apple's stock price should have fallen relative to its typical market-driven fluctuations. We term any unusually large price changes - adjusted for market-wide effects on the stock prices of all firms - "abnormal returns."
To our knowledge, Apple had no other specific events occurring during the event window that were likely to impact its stock price relative to the overall market. Therefore, we can reasonably attribute any abnormal returns during the event window to the publicity surrounding Apple's tax strategy.
Adjusting for overall market effects, Apple's share price experienced an abnormal (positive) return of 2.63 percent, which is not statistically significant.
No problem for Apple
Why the non-event? Here are a few possible explanations.
1. Investment capital seeks out the highest possible risk-adjusted returns. Notwithstanding Senator John McCain's pronouncement that "[t]he proper place for the bulk of Apple's creative energy ought to go into its innovative products and services, not in [sic] its tax department," investors don't necessarily care where the returns come from, as long as they come. A sustainable reduction in global tax liability may not be as sexy as an iPad sale, but it, too, supports a healthy share price. To put it in perspective, Apple would have had to generate an additional $51 billion in 2012 revenues to generate the same after-tax profit bump - at the US statutory rate of 35 percent - it achieved through careful tax planning. That's a lot of iPads; three times as many as Apple plans to ship this year, in fact.
2. Corporate income tax is only one of the taxes multinationals pay, and reducing their effective tax rate releases more profits to shareholders (who pay taxes) and/or investment opportunities (which will increase labor productivity, wage rates and, yes, tax receipts). Investors understand this dynamic, even if some politicians don't.
3. Taxes are complicated. And boring. And unpopular. The fact that the British and US hearings didn't generate a public outcry the way, say, the BP Deepwater Horizon oil spill did, isn't surprising.
4. Unlike other reputation killers (e.g. oil spills, patient deaths, and abusive labor practices), the "victims" here are governments. And citizens across the globe generally like saving taxes, regardless of the political leanings of their governments or their personal voting preferences.
Investors reward companies that maximize shareholder value, whether through effective tax planning or creating innovative products and services. Perhaps policymakers should spend less time punishing multinationals for legally fulfilling their responsibilities to shareholders and more time reforming the corporate tax system. Then, they could satisfy Senator McCain's wish to devote their creative energies to their core businesses.
Kara Boatman is Senior Vice President and Tom Hopkins is CEO of Fortisure Consulting LP in San Francisco, CA.
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