Skip to main content
Log in

Tax haven incorporation and financial reporting transparency

  • Published:
Review of Accounting Studies Aims and scope Submit manuscript


A widespread perception exists that tax havens facilitate corporate opacity. This study provides new evidence on the association between tax havens and the transparency of firm financial reporting using a unique group of firms whose parent companies are incorporated in tax havens but whose headquarters or primary operations—that is, their base—are in nonhaven countries. While most research suggests a negative association between tax havens and transparency, I examine whether this association depends on the firm’s corporate governance environment as well as its capital market incentives. I find that the negative association is limited to firms subject to weak governance in the base country. In contrast, I find, among firms in stronger governance environments, a positive association between tax haven incorporation and transparency, which is most concentrated among firms with greater capital market incentives. My findings suggest that future researchers should use caution when assuming an unambiguous negative association between tax havens and corporate transparency. The study also provides unique evidence that tax planning can motivate higher transparency in certain settings.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Similar content being viewed by others


  1. I assume that the base country is exogenous, following prior research (e.g., El Ghoul et al. 2013).

  2. Financial information is “readily understandable” if it conveys enough information to help users in making economic decisions but not so much detail as to cloud the underlying economics (Barth and Schipper 2008).

  3. The direct benefit to shareholders of investing in a tax haven firm is the low or 0 % withholding tax rates, in contrast to withholding tax rates of other countries, which can range to up to 40% for nonresident investors (Dharmapala 2008). Anecdotal evidence also suggests that attracting foreign capital is an additional motivation for tax haven parent incorporation. Both Ingersoll-Rand and Cooper Industries indicated in their registration statements that reincorporating in a tax haven would help them to attract a wider range of investors. See Appendix 1 for excerpts from these firms’ disclosures.

  4. Although criminal cases against corporate officers are often tried at the federal level (i.e., Securities and Exchange Commission vs. Company X), the laws governing internal affairs of the corporation and civil cases against officers are generally determined by the firm’s legal domicile, which is the tax haven country in the case of tax haven firms. For firms incorporated outside the United States, shareholder suits that are brought in the U.S. district court will still apply the governing rules of the foreign jurisdiction of incorporation (Kun 2004; Moon 2018).

  5. While the weaker shareholder protections resulting from incorporating in a tax haven could provide opportunities for misconduct and low transparency for any firm with a presence in a tax haven, this effect should be most salient for firms with parents incorporated in tax havens, because the corporate law applies to the entire multinational corporation rather than only to the activities of one subsidiary.

  6. Tax haven incorporation could result in lower transparency, and the firm could still receive a clean audit as long as managers do not materially misstate earnings. The auditor’s purpose is to provide reasonable assurance that the financial statements are prepared in accordance with GAAP and are not materially misstated. An auditor does not opine on whether managers are investing prudently, advancing the interests of shareholders, or making vague disclosures, especially if disclosures are voluntary.

  7. Atwood and Lewellen (2019) examine the complementarity between tax avoidance and manager diversion in weak governance settings, using tax haven parents as a unique setting that has the opacity necessary to observe this complementarity. They do not examine whether firms with tax haven parents are more or less transparent than other firms, or whether the association between tax haven parents and transparency varies with the strength of governance.

  8. Sixty-eight percent of firms with tax haven parents in my sample have their primary listing in their base country. When the firm is both based and listed in a strong governance country, shareholders and regulators can bring legal actions against managers in that country in cases of criminal misconduct. For foreign issuers based in weak governance countries, a strong reporting environment in the listing country may not deter manager misconduct (e.g., Chen et al. 2016).

  9. The sample period ends in 2013 because the data from Atwood and Lewellen (2019) used for this study is hand-collected through the year 2013. In an untabulated test, I obtain data through 2016 (prior to the vast changes of the Tax Cuts and Jobs Act of 2017) for my sample and find that inferences from the hypothesis tests are unchanged in the period of 2014–2016.

  10. A tax haven firm’s base country is the nonhaven country first identified using this algorithm: (1) the country where the firm was incorporated prior to incorporating in the tax haven country, (2) the country where the firm is headquartered, (3) the country where the firm generates more than 50% of its revenue or has more than 50% of its assets, or (4) the country of the firm’s primary operating subsidiary (Allen and Morse 2013). Atwood and Lewellen (2019) determine this information by examining reports from Mergent Online, Mergent Webreports Worldscope, and SEC EDGAR.

  11. For the nonhaven firms from Compustat North America, I classify firm-years with nonmissing nonzero foreign tax (TXFO) or foreign pre-tax income (PIFO) as multinational. For nonhaven firms from Compustat Global, I retrieved geographic segment information from Thomson Eikon, and I classify firm-years reporting more than one geographic segment or reporting revenue outside of the base country as multinational.

  12. In addition to the consolidated parent firm (e.g., Microsoft Corporation), Compustat sometimes also includes significant subsidiaries as a separate observation, even if they are consolidated into the operations of the parent firm. See Table 1 for more details on the process for identifying subsidiaries.

  13. I include financial firms (SIC 6,000–6,999) in my sample; however, many accounting studies drop these firms. My sample includes only 73 tax haven firm-years in this SIC group. All results are robust to their exclusion.

  14. The largest number of firms originate from China. A primary reason that a large number of Chinese firms have top entities incorporated in tax havens is that Chinese firms have had especially strong tax incentives to incorporate their parent entity in a tax haven. Prior to 2008, China had preferential tax rules, including tax holidays and preferential tax rates, for companies incorporated outside of China (Li 2006). Moreover, recent research has found that Chinese-based foreign firms have continued to benefit from tax haven incorporation even after a 2008 tax law change ended the preferential tax rules for foreign entities because they responded to this tax change by shifting more income out of China (An and Tan 2014).

  15. Barth and Schipper (2008) describe three types of empirical proxies to measure transparency, including market-, analyst-, and accounting-based measures. The earnings–return relation is a market-based measure. I tabulate results using analyst and accounting-based measures in additional analyses.

  16. Potential measures of information asymmetry more generally, such as liquidity (e.g., bid-ask spread or the number of zero return days) also reflect other factors, such as the number of shares, demand for the firm’s stock, and transaction costs, and do not directly measure transparency related to financial reporting, which is my construct of interest. I tabulate additional financial reporting transparency measures in additional analyses.

  17. I estimate the model by accounting standard, industry (Fama French 17 classification), and year and require at least 10 observations per estimation. I provide the calculation details for TRANS in Appendix 3. Following research using valuation data in international settings (e.g., Francis et al. 2005b; Doidge et al. 2004), I use returns for the primary listing to estimate TRANS.

  18. All variables are defined in detail in Appendix Table 9. All continuous variables are winsorized at 1 and 99% unless otherwise noted in Appendix Table 9.

  19. I use data from Bureau Van Dijk, which are not historical, to calculate HAVENSUB, NCO, and NSUB. I retrieved these data in January 2018, and these variables are constant throughout the sample for each firm.

  20. I focus on governance as the country-level variable of interest (rather than financial reporting rules or information dissemination) because this factor determines whether, on average, investors can discipline managers. Even if financial reporting requirements should lead to higher transparency, managers of firms based in weak governance countries may be able to avoid following these requirements, due to the lack of potential discipline (e.g., Chen et al. 2016).

  21. The Investor Protection score from Atwood and Lewellen (2019) is preferred to other potential measures of country-level governance (e.g., the Anti-Director Index from La Porta et al. 1998, common law indicator variable), because it captures four underlying facets of governance and therefore more comprehensively measures governance. In addition, Investor Protection can be measured for all countries in my sample, and the period of measurement overlaps well with the sample period, in contrast to the La Porta et al. (1998) data, which ends in 1995. Following Atwood and Lewellen (2019), I use the average of the four components rather than a factor score, because the raw values (ranging from 0 to 10) and the mean split of the simple average are more readily interpretable, compared to a factor score. All inferences regarding the hypotheses are robust to designating Strong based on a common law indicator variable or the mean of the factor score of these four components.

  22. To provide additional evidence that cross-country differences do not drive my results, I also estimate Eq. (1) for a sample of firms based and primarily listed in the United States using U.S. GAAP. I find a positive and significant coefficient on TRANS in this subsample (p < 0.01), which is consistent with the primary results.

  23. Mean TRANS in strong governance countries is 0.454 (untabulated).

  24. To provide evidence on whether tax haven firms engage in more accounting fraud, I retrieve data from Audit Analytics, which is available from 1995 for SEC registrants. I find only two tax haven firms in my sample with evidence of accounting fraud (Tyco International Ltd. and Marvel Technology Group Ltd.). The scarcity of fraud cases suggests that they are isolated incidences rather than being indicative of greater fraud on average in tax haven firms, at least among firms based in strong governance countries such as the United States.

  25. Sixty-two (29) percent of all (tax haven) firm-years are classified as Top Exchg equal to 1.

  26. See Table 5 for details on ownership concentration calculation. Forty-three percent of firms based in weak governance countries have high ownership concentration.

  27. I add a variable for time trend (Timetrend), since disclosures may increase over time. I exclude the fixed effects due to the small sample size.

  28. The exogenous tax incentive variable is calculated as the statutory corporate tax rate in the base country less the mean statutory tax rate of the sample countries in year t. I follow the guidance from Lennox et al. (2012) in implementing the Heckman (1979) procedure. I exclude the exogenous variable from the second-stage model. To qualify as an exclusionary variable, the researcher must assume that this variable should have no direct association with the Y variable (i.e., TRANS). An untabulated regression of TRANS on the exclusionary variable and industry, year, and base country fixed effects confirms no significant association between this variable and TRANS.

  29. I require that firms are both based and listed in IFRS-adopting countries to provide assurance that the firm will be subject to these reporting requirements. I limit the sample to countries with strong governance to hold the country-level governance environment constant, since Daske et al. (2008) find capital market benefits of IFRS adoption only in countries with institutional environments that are conducive to transparency.

  30. The links to the full document filings referenced in this Appendix are included at the end of the Appendix.


  • Abdi, F., and A. Ranaldo. (2017). A simple estimation of bid-ask spreads from daily close, high, and low prices. The Review of Financial Studies 30 (12): 4,437–4,480.

    Article  Google Scholar 

  • Allen, E.J., and S.C. Morse. (2013). Tax-haven incorporation for U.S.-headquartered firms: No exodus yet. National Tax Journal 66 (2): 395–420,279.

    Article  Google Scholar 

  • An, Z., and C. Tan. 2014. Taxation and income shifting: Empirical evidence from a quasi-experiment in China. Economic Systems 38 (4): 588–596.

    Article  Google Scholar 

  • Atwood, T.J., and C. Lewellen. (2019). The complementarity between tax avoidance and manager diversion: Evidence from tax haven firms. Contemporary Accounting Research 36 (1): 259–294.

    Article  Google Scholar 

  • Badertscher, B.A., J.D. Phillips, M. Pincus, and S.O. Rego. (2009). Earnings management strategies and the trade-off between tax benefits and detection risk: To conform or not to conform? The Accounting Review 84 (1): 63–97.

  • Balakrishnan, K., J.L. Blouin, and W.R. Guay. (2019). Tax aggressiveness and corporate transparency. The Accounting Review 94 (1): 45–69.

  • Ball, R., S.P. Kothari, and A. Robin. (2000). The effect of international institutional factors on properties of accounting earnings. Journal of Accounting and Economics 29 (1): 1–51.

  • Balsam, S. (1998). Discretionary accounting choices and CEO compensation. Contemporary Accounting Research 15 (3): 229–252.

    Article  Google Scholar 

  • Barth, M.E., and K. Schipper. (2008). Financial reporting transparency. Journal of Accounting, Auditing & Finance 23 (2): 173–190.

    Article  Google Scholar 

  • Barth, M.E., W.R. Landsman, and M.H. Lang. (2008). International accounting standards and accounting quality. Journal of Accounting Research 46 (3): 467–498.

    Article  Google Scholar 

  • Barth, M.E., W.R. Landsman, M. Lang, and C. Williams. (2012). Are IFRS-based and US GAAP-based accounting amounts comparable? Journal of Accounting and Economics 54 (1): 68–93.

    Article  Google Scholar 

  • Barth, M.E., Y. Konchitchki, and W.R. Landsman. (2013). Cost of capital and earnings transparency. Journal of Accounting and Economics 55 (2–3): 206–224.

    Article  Google Scholar 

  • Bebchuk, L., A. Cohen, and A. Ferrell. (2009). What matters in corporate governance? The Review of Financial Studies 22 (2): 783–827.

    Article  Google Scholar 

  • Behn, B.K., J.-H. Choi, and T. Kang. (2008). Audit quality and properties of analyst earnings forecasts. The Accounting Review 83 (2): 327–349.

    Article  Google Scholar 

  • Bell, J., Esq. (2019). U.S. securities offerings and exchange listing by foreign private issuers. Morrison Foerster.

  • Bennedsen, M., and S. Zeume. (2018). Corporate tax havens and transparency. The Review of Financial Studies 31 (4): 1,221–1,264.

    Article  Google Scholar 

  • Biddle, G.C., G. Hilary, and R.S. Verdi. (2009). How does financial reporting quality relate to investment efficiency? Journal of Accounting and Economics 48 (2–3): 112–131.

    Article  Google Scholar 

  • Billings, B.K. 1999. Revisiting the relation between the default risk of debt and the earnings response coefficient. The Accounting Review 74 (4): 509–522.

    Article  Google Scholar 

  • Black, D.E., S.S. Dikolli, and S.D. Dyreng. (2013). CEO pay-for-complexity and the risk of managerial diversion from multinational diversification. Contemporary Accounting Research 31: 103–135.

    Article  Google Scholar 

  • Blouin, J. L., W. K. Black, and D. C. Johnston. (2017). Could the paradise papers lead to tax reforms? Podcast. Knowledge@Wharton.

  • Bozanic, Z., J.L. Hoopes, J.R. Thornock, and B.M. Williams. (2017). IRS attention. Journal of Accounting Research 55 (1): 79–114.

    Article  Google Scholar 

  • Bushman, R.M., and A.J. Smith. (2003). Transparency, financial accounting information, and corporate governance. Economic Policy Review 9 (1): 65–87.

    Google Scholar 

  • Bushman, R.M., J.D. Piotroski, and A.J. Smith. (2004). What determines corporate transparency? Journal of Accounting Research 42 (2): 207–252.

    Article  Google Scholar 

  • Cassell, C.A., L.A. Myers, and T.A. Seidel. (2015). Disclosure transparency about activity in valuation allowance and reserve accounts and accruals-based earnings management. Accounting, Organizations and Society 46: 23–38.

    Article  Google Scholar 

  • Chen, K.-C., Q. Cheng, Y.C. Lin, Y.-C. Lin, and X. Xiao. (2016). Financial reporting quality of Chinese reverse merger firms: The reverse merger effect or the weak country effect? The Accounting Review 91 (5): 1,363–1,390.

    Article  Google Scholar 

  • Chen, C.-W., B.F. Hepfer, P.J. Quinn, and R.J. Wilson. (2018). The effect of tax-motivated income shifting on information asymmetry. Review of Accounting Studies 23 (3): 958–1,004.

    Article  Google Scholar 

  • Collins, D.W., and S.P. Kothari. (1989). An analysis of intertemporal and cross-sectional determinants of earnings response coefficients. Journal of Accounting and Economics 11 (2–3): 143–181.

    Article  Google Scholar 

  • Daske, H., L. Hail, C. Leuz, and R. Verdi. (2008). Mandatory IFRS reporting around the world: Early evidence on the economic consequences. Journal of Accounting Research 46 (5): 1,085–1,142.

    Google Scholar 

  • Dechow, P.M., and I.D. Dichev. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review 77 (s-1): 35–59.

    Article  Google Scholar 

  • Desai, M.A. (2005). The degradation of reported corporate profits. The Journal of Economic Perspectives 19 (4): 171.

    Article  Google Scholar 

  • Desai, M.A. (2009). The decentering of the global firm. The World Economy 32 (9): 1,271–1,290.

    Article  Google Scholar 

  • Desai, M.A., and D. Dharmapala. (2006). Corporate tax avoidance and high-powered incentives. Journal of Financial Economics 79 (1): 145–179.

    Article  Google Scholar 

  • Desai, M.A., and D. Dharmapala. (2010). Do strong fences make strong neighbors? National Tax Journal 63 (4): 723–740.

    Article  Google Scholar 

  • Desai, M.A., C.F. Foley, and J.R. Hines Jr. (2006). The demand for tax haven operations. Journal of Public Economics 90 (3): 513–531.

    Article  Google Scholar 

  • Desai, M.A., A. Dyck, and L. Zingales. (2007). Theft and taxes. Journal of Financial Economics 84 (3): 591–623.

    Article  Google Scholar 

  • Dharmapala, D. (2008). What problems and opportunities are created by tax havens? Oxford Review of Economic Policy 24 (4): 661–679.

    Article  Google Scholar 

  • Dharmapala, D., and J.R. Hines Jr. (2009). Which countries become tax havens? Journal of Public Economics 93 (9–10): 1,058–1,068.

    Article  Google Scholar 

  • Doidge, C., G.A. Karolyi, and R.M. Stulz. (2004). Why are foreign firms listed in the U.S. worth more? Journal of Financial Economics 71 (2): 205–238.

    Article  Google Scholar 

  • Doyle, J.T., W. Ge, and S. McVay. (2007). Accruals quality and internal control over financial reporting. The Accounting Review 82 (5): 1,141–1,170.

    Article  Google Scholar 

  • Drucker, J., and A. Barinka. (2015). Etsy’s B Corp status challenged by tax group over Irish haven. Bloomberg Business, September 1.

  • Durnev, A., T. Li, and M. Magnan. (2016). Are offshore firms worth more? Journal of Corporate Finance 36: 131–156.

    Article  Google Scholar 

  • Durnev, A., T. Li, and M. Magnan. (2017). Beyond tax avoidance: Offshore firms’ institutional environment and financial reporting quality. Journal of Business Finance & Accounting 44 (5–6): 646–696.

    Article  Google Scholar 

  • Dyreng, S.D., and B.P. Lindsey. (2009). Using financial accounting data to examine the effect of foreign operations located in tax havens and other countries on U.S. multinational firms’ tax rates. Journal of Accounting Research 47 (5): 1,283–1,316.

    Article  Google Scholar 

  • Dyreng, S.D., M. Hanlon, and E.L. Maydew. (2012). Where do firms manage earnings? Review of Accounting Studies 17 (3): 649–687.

    Article  Google Scholar 

  • El Ghoul, S., O. Guedhami, Y. Ni, J. Pittman, and S. Saadi. (2013). Does information asymmetry matter to equity pricing? Evidence from firms’ geographic location. Contemporary Accounting Research 30 (1): 140–181.

    Article  Google Scholar 

  • Francis, D. (2016). 0.0001 percent of people and companies named in Panama papers are American. Foreign Policy (Online), May 9.

  • Francis, Jennifer, R. LaFond, P. Olsson, and K. Schipper. (2005a). The market pricing of accruals quality. Journal of Accounting and Economics 39 (2): 295–327.

    Article  Google Scholar 

  • Francis, Jere R., I.K. Khurana, and R. Pereira. (2005b). Disclosure incentives and effects on cost of capital around the world. The Accounting Review 80 (4): 1,125–1,162.

    Article  Google Scholar 

  • Francis, J.R., S. Huang, I.K. Khurana, and R. Pereira. (2009). Does corporate transparency contribute to efficient resource allocation? Journal of Accounting Research 47 (4): 943–989.

    Article  Google Scholar 

  • Gelles, D. (2014). Obama budget seeks to eliminate inversions. New York Times DealBook, March 5.

  • Gravelle, J. G. (2015). Tax havens: International tax avoidance and evasion. Congressional Research Service Report for Congress: 7–5,700,, R40623.

  • Hainmueller, J. (2012). Entropy balancing for causal effects: A multivariate reweighting method to produce balanced samples in observational studies. Political Analysis 20 (1): 25–46.

    Article  Google Scholar 

  • Hanlon, M., and S. Heitzman. 2010. A review of tax research. Journal of Accounting and Economics 50 (2–3): 127–178.

    Article  Google Scholar 

  • Hanlon, M., E.L. Maydew, and J.R. Thornock. (2015). Taking the long way home: U.S. tax evasion and offshore investments in U.S. equity and debt markets. The Journal of Finance 70 (1): 257–287.

    Article  Google Scholar 

  • Harford, J., S.A. Mansi, and W.F. Maxwell. (2008). Corporate governance and firm cash holdings in the US. Journal of Financial Economics 87 (3): 535–555.

    Article  Google Scholar 

  • Hayn, C. (1995). The information content of losses. Journal of Accounting and Economics 20 (2): 125–153.

    Article  Google Scholar 

  • Heckman, J.J. (1979). Sample selection bias as a specification error. Econometrica 47 (1): 153–161.

    Article  Google Scholar 

  • Hope, O.-K. (2003). Disclosure practices, enforcement of accounting standards, and analysts’ forecast accuracy: An international study. Journal of Accounting Research 41 (2): 235–272.

    Article  Google Scholar 

  • Jensen, M.C., and W.H. Meckling. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics 3 (4): 305–360.

    Article  Google Scholar 

  • Kapner, S. (2015). How Etsy crafted a tax strategy in Ireland: Some transparency was sacrificed when intellectual property was transferred to Dublin. Wall Street Journal (Online), August 16, sec. Tech.

  • Kim, J.-B., and T. Li. (2014). Multinationals’ offshore operations, tax avoidance, and firm-specific information flows: International evidence. Journal of International Financial Management & Accounting 25 (1): 38–89.

    Article  Google Scholar 

  • Kothari, S.P., S. Shu, and P.D. Wysocki. (2009). Do managers withhold bad news? Journal of Accounting Research 47 (1): 241–276.

    Article  Google Scholar 

  • Kuehner-Hebert, K. (2015). Etsy avoids disclosure with Irish tax haven. CFO (Online), August 14.

  • Kun, O. (2004). Corporate inversions: The interplay of tax, corporate, and economic implications. Delaware Journal of Corporate Law 29 (2): 313–376.

    Google Scholar 

  • La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R.W. Vishny. (1998). Law and finance. Journal of Political Economy 106 (6): 1,113–1,155.

    Article  Google Scholar 

  • Lang, M., and M. Maffett. (2010). Economic effects of transparency in international equity markets: A review and suggestions for future research. Foundations and Trends in Accounting 5 (3): 175–241.

    Article  Google Scholar 

  • Lang, M., J.S. Raedy, and M.H. Yetman. (2003). How representative are firms that are cross-listed in the United States? An analysis of accounting quality. Journal of Accounting Research 41 (2): 363–386.

    Article  Google Scholar 

  • Lang, M., K.V. Lins, and M. Maffett. (2012). Transparency, liquidity, and valuation: International evidence on when transparency matters most. Journal of Accounting Research 50 (3): 729–774.

    Article  Google Scholar 

  • Leikvang, H. (2012). Piercing the veil of secrecy: Securing effective exchange of information to remedy the harmful effects of tax havens. Vanderbilt Journal of Transnational Law 45: 293–342.

    Google Scholar 

  • Lennox, C.S., J.R. Francis, and Z. Wang. (2012). Selection models in accounting research. The Accounting Review 87 (2): 589–616.

    Article  Google Scholar 

  • Lewellen, C., L. Mauler, and L. Watson. (2021). Tax haven incorporation and the cost of capital. Contemporary Accounting Research 38 (4): 2,982–3,016.

    Article  Google Scholar 

  • Li, J. (2006). The rise and fall of Chinese tax incentives an implications for international tax debates. Florida Tax Review 8 (7): 669–712.

    Google Scholar 

  • Markle, K.S., and D.A. Shackelford. (2012). Cross-country comparisons of corporate income taxes. National Tax Journal 65 (3): 493–527.

    Article  Google Scholar 

  • McGuire, S.T., D. Wang, and R.J. Wilson. (2014). Dual class ownership and tax avoidance. The Accounting Review 89 (4): 1,487–1,516.

    Article  Google Scholar 

  • McNichols, M.F. (2002). Discussion of the quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review 77 (s-1): 61–69.

    Article  Google Scholar 

  • Moon, W.J. (2018). Tax havens as producers of corporate law. Michigan Law Review 116 (6): 1,081–1,100.

    Article  Google Scholar 

  • Morgenthau, R. (2012). These islands aren’t just a shelter from taxes. New York Times, May 6 edition.

  • Nemeth, L. (2017). Foreign private issuer guide: How US securities law obligations differ from those of domestic issuers. Squire Patton Boggs.

  • O’Donovan, J., H.F. Wagner, and S. Zeume. (2019). The value of offshore secrets: Evidence from the Panama papers. The Review of Financial Studies 32 (11): 4,117–4,155.

    Article  Google Scholar 

  • OECD. (1998). Harmful tax competition: An emerging global issue. OECD Publishing.

    Book  Google Scholar 

  • Petersen, M.A. (2009). Estimating standard errors in finance panel data sets: comparing approaches. The Review of Financial Studies 22 (1): 435–480.

    Article  Google Scholar 

  • Plitch, P. (2003). Activists engage Ingersoll-Rand about tax haven. Wall Street Journal, Eastern edition, May 28.

  • Prawitt, D.F., J.L. Smith, and D.A. Wood. (2009). Internal audit quality and earnings management. The Accounting Review 84 (4): 1,255–1,280.

    Article  Google Scholar 

  • Rankin, J. (2014). Tax inversion takes a hit as Walgreen Alliance boots stays in US. The Guardian, August 6, sec. Business.

  • Seida, J.A., and W.F. Wempe. (2004). Effective tax rate changes and earnings stripping following corporate inversion. National Tax Journal 57 (4): 805–828.

    Article  Google Scholar 

  • Siegel, J. (2005). Can foreign firms bond themselves effectively by renting U.S. securities laws? Journal of Financial Economics 75 (2): 319–359.

    Article  Google Scholar 

  • Tax Justice Network. (2007). Briefing Paper: Identifying tax havens and offshore finance centres.

  • Town, N., and J. Betts. (2015). Corporate governance and directors’ duties in Bermuda: Overview. Westlaw.

  • U.S. Senate Permanent Subcommittee on Investigations. (2006). Tax haven abuses: The enablers, the tools and secrecy. United States Senate.

  • Warfield, T.D., J.J. Wild, and K.L. Wild. (1995). Managerial ownership, accounting choices, and informativeness of earnings. Journal of Accounting and Economics 20 (1): 61–91.

    Article  Google Scholar 

  • Worrell, D., and S. Lowe. (2011). International business and financial services centres in the Caribbean. Economic Review XXXVII (Number 1).

Download references


This study is based on my dissertation completed at Florida State University, which won the 2017 American Taxation Association/Pricewaterhouse Coopers Outstanding Tax Dissertation Award and the 2017 International Accounting Section Outstanding International Accounting Dissertation Award. I am grateful for the guidance of my dissertation committee: Rick Morton, Landon Mauler, and Yingmei Cheng, and especially my co-chairs, Bruce Billings and T.J. Atwood. I also appreciate helpful comments from Jennifer Blouin (editor), Frank Heflin, Jodi Henley, Jon Nash, Anthony Chen, Spencer Pierce, Michelle McAllister, Andy Bauer, Michael Donohoe, Paul Demeré, Brad Lindsey (discussant), Eric Beardsley (discussant), Andy Schmidt, Joe Brazel, Ed Maydew, Rob Whited, Nathan Goldman, Luke Watson, Michelle Hanlon, Leslie Robinson, Pete Lisowsky, and an anonymous reviewer. I also appreciate helpful comments from workshop participants at Florida State University, the University of North Florida, the University of Cincinnati, the University of Illinois at Urbana-Champaign, North Carolina State University, Lehigh University, the 2016 AAA Annual Meeting, the 2016 ATA Midyear Meeting, and the 2018 Norwegian Tax Accounting Symposium. I gratefully acknowledge funding from the AICPA Foundation, the College of Business at Florida State University, and the Poole College of Management.

Author information

Authors and Affiliations


Corresponding author

Correspondence to Christina M. Lewellen.

Additional information

Publisher’s note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.


Appendix 1: Excerpts from tax haven firm disclosures

The following excerpts from tax haven firms’ disclosures illustrate examples of how sample tax haven firms provide voluntary disclosure regarding the tax haven use, such as the motivations for incorporating in the tax haven or the risks that the tax haven strategy may present to shareholders. These examples illustrate that tax haven firms appear to provide greater disclosure to address potential concerns, rather than just ignoring the risks.

The following excerpt from Royal Caribbean’s 10-K illustrates how a tax haven firm used disclosure to acknowledge, and alert shareholders to, potential agency concerns that may result from having the parent entity incorporated in a tax haven.Footnote 30

We are not a United States corporation and our shareholders may be subject to the uncertainties of a foreign legal system in protecting their interests.

Our corporate affairs are governed by our Articles of Incorporation and By-Laws and by the Business Corporation Act of Liberia. The provisions of the Business Corporation Act of Liberia resemble provisions of the corporation laws of a number of states in the United States. However, while most states have a fairly well developed body of case law interpreting their respective corporate statutes, there are very few judicial cases in Liberia interpreting the Business Corporation Act of Liberia. As such, the rights and fiduciary responsibilities of directors under Liberian law are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain United States jurisdictions. For example, the right of shareholders to bring a derivative action in Liberian courts may be more limited than in United States jurisdictions. There may also be practical difficulties for shareholders attempting to bring suit in Liberia and Liberian courts may or may not recognize and enforce foreign judgments. Thus, our public shareholders may have more difficulty in protecting their interests with respect to actions by management, directors or controlling shareholders than would shareholders of a corporation incorporated in a United States jurisdiction.

Similarly, the following excerpt from Herbalife’s 10-K illustrates the legal risk of having the parent entity incorporated in a tax haven:

Holders of our common shares may face difficulties in protecting their interests because we are incorporated under Cayman Islands law.

Our corporate affairs are governed by our amended and restated memorandum and articles of association, by the Companies Law (2012 Revision), or the Companies Law, and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States. Therefore, shareholders may have more difficulty in protecting their interests in the face of actions by our management or board of directors than would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively less developed nature of Cayman Islands law in this area.

Shareholders of Cayman Islands exempted companies such as Herbalife have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of our shareholders. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

This excerpt from Manchester United’s 20-F also highlights the legal risk associated with the parent company incorporated in the Cayman Islands:

Anti-takeover provisions in our organizational documents and Cayman Islands law may discourage or prevent a change of control, even if an acquisition would be beneficial to our shareholders, which could depress the price of our Class A ordinary shares and prevent attempts by our shareholders to replace or remove our current management.

Our amended and restated memorandum and articles of association contain provisions that may discourage unsolicited takeover proposals that shareholders may consider to be in their best interests. In particular, our amended and restated memorandum and articles of association permit our board of directors to issue preference shares from time to time, with such rights and preferences as they consider appropriate. Our board of directors could also authorize the issuance of preference shares with terms and conditions and under circumstances that could have an effect of discouraging a takeover or other transaction. We are also subject to certain provisions under Cayman Islands law which could delay or prevent a change of control. In particular, any merger, consolidation or amalgamation of the Company would require the active consent of our board of directors. Our board of directors may be appointed or removed by the holders of the majority of the voting power of our ordinary shares (which is controlled by our principal shareholder). Together these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our Class A ordinary shares.

The following excerpts from tax haven firm disclosures illustrate anecdotally how tax haven firms used disclosure to explain their motivations for incorporating the parent in a tax haven and indicate that capital markets are important to these firms. This excerpt is from Cooper Industries’ prospectus explaining the benefits of their reincorporation in Bermuda:

We believe this reorganization will facilitate the growth of your company by enabling it to gain business, financial and strategic advantages that are not available under our current corporate structure. For example, expansion of the company’s international business is an important part of our business strategy and significant growth opportunities exist in the international marketplace. The reorganization should enhance our competitiveness regarding these opportunities. It should also increase our operational flexibility, improve our global tax position and cash flow, and increase our capacity to reduce debt and repurchase stock. Additionally, the company should be a more attractive investment alternative to a wider range of investors.

A similar explanation of the benefits of tax haven incorporation can be found in Ingersoll-Rand Company’s prospectus:

We believe that reorganizing as a Bermuda company will enable us to realize a variety of potential business, financial and strategic benefits. We also believe the reorganization will allow us to implement our business strategy more effectively. Specifically, the reorganization should help enhance our business growth and cash flow and reduce our worldwide effective tax rate. Additionally, we believe IR-Limited will be a more attractive investment alternative to a wider range of investors.

Below are the links to the filings referenced in this Appendix :

Appendix 2

Variable definitions

Primary regression variables:


Earnings transparency, measured as the contemporaneous association between annual returns and earnings for firm i in year t, using a two-step procedure developed by Barth et al. (2013). See Appendix C for calculation specifics.


An indicator variable equal to 1 if the parent entity is incorporated in a tax haven country (using the list from Dyreng and Lindsey 2009) and the firm is based (headquartered or primarily operates) in a nonhaven country in year t.

Investor Protection

The Investor Protection Score from Atwood and Lewellen (2019), which is the average of four World Bank indices (Extent of Director Liability, Ease of Shareholder Suits, Rule of Law, and Control of Corruption).a


An indicator variable equal to 1 if Investor Protection in the country is greater than the sample mean (6.45), 0 otherwise.


The fiscal year minus the first year the firm appears in the Compustat database divided by the largest number of possible years in Compustat (65 for Compustat North America and 28 for Compustat Global).


Total debt (DLTT+DLC) divided by lagged total assets (AT).


An indicator variable equal to 1 if the firm is listed in more than one country, 0 otherwise.


The standard deviation of return on equity (IB/SEQ) from year t−2 to t.


The standard deviation of monthly exchange rates for each currency (from Compustat) in year t.


Sales growth percentage, calculated as the change in total sales (SALE) from year t−1 to year t, divided by total sales in year t−1.


An indicator variable equal to 1 if the firm reports tax haven subsidiaries in Bureau Van Dijk (data retrieved January 2018), 0 otherwise.


An indicator variable equal to 1 if the firm experienced a loss in year t (NI < 0).


The natural log of the number of countries the firm operates in as evidenced by subsidiary locations, retrieved from Bureau Van Dijk as of January 2018. This variable is set to 0 if missing.


The natural log of the number of subsidiaries the firm has, which is retrieved from Bureau Van Dijk as of January 2018. This variable is set to 0 if missing.


The natural log of the length of the operating cycle in days (days to sell inventory plus average collection period). Days to sell inventory is the average of the last two years of total inventories (INVT) divided by average daily COGS (COGS/360). The average collection period is the average of the last two years of total receivables (RECT) divided by average daily sales (SALE/360).


Firm size, measured as the natural log of the market value of equity (PRCC_F*CSHO), where MVE is first translated into U.S. dollars.


Tax aggressiveness, calculated as TAXAVOID for firm i in year t minus mean TAXAVOID for the firm’s industry (Fama French 17 classification) in year t. TAXAVOID is calculated as the statutory tax rate in the firm’s base country in year t less the firm’s GAAP ETR (TXT/PI). GAAP ETR is winsorized at 0 and 1.


An indicator variable equal to 1 for firms reporting under U.S. GAAP, 0 otherwise.

Variables for the alternate transparency proxies (Table 7 )

Accruals quality variables are estimated from the following regression model from Dechow and Dichev (2002), modified by McNichols (2002) that is estimated separately for each accounting standard (ACCTSTD), industry (Fama French 17), and year combination with at least 10 observations:b

ACCit = ∝0 + ∝1CFOit − 1 + ∝2CFOit + ∝3CFOit + 1 + ∝4REVit + ∝5PPEit + τit (3)


The change in SALE from year t−1 to year t, scaled by average total assets (AT).


Total accruals, calculated as (IB-OANCF) divided by average total assets (AT).


Operating cash flows (OANCF) scaled by average total assets.


Gross property, plant, and equipment (PPEGT) divided by average total assets (AT).


Abnormal accruals, measured as the absolute value of firm i's residuals from Eq. (3). Higher values indicate poorer accruals quality.


Accruals quality measured as the standard deviation of firm i's residuals from Eq. (3) from year t−2 to year t, multiplied by -1. Higher values of AQ indicate better accruals quality.


The absolute value of the difference between the median consensus EPS forecast and actual EPS for year t scaled by the latest available stock price in year t-1 (all from I/B/E/S summary file) multiplied by -1. I require that the forecasts be within a period beginning two months before the earnings announcement date and ending three days before the earnings announcement date. I remove stale forecasts by using only the most recent forecast. Following Behn et al. (2008), observations having ACCURACY smaller than -1.5 are removed as outliers.


Actual earnings per share (from I/B/E/S summary file) winsorized at 5 and -5 (following Behn et al. (2008)), where EPS is first translated into U.S. dollars.


The log of the average of the number of calendar days between the forecast date and actual earnings announcement date.


The natural log of the number of analysts following the client at the most recent consensus forecast.


The change in actual EPS scaled by the latest available stock price in the previous year (both from I/B/E/S summary file).

Other variables:

High Afol

High analyst following, defined as an indicator variable equal to 1 if the number of analysts following the firm in year t is above the sample mean of 5, zero otherwise. Analyst data was retrieved from I/B/E/S.

Top Exchg

An indicator variable equal to 1 (0 otherwise) for firms primarily listed on the top 10 exchanges of the world that are in strong governance countries as of 2013 using the World Federation of Exchanges (WFE) report. Top exchanges include NYSE, NASDAQ, NYSE Euronext (Europe), London, Toronto, Tokyo, and Deutsche Börse.

High Market Cap

An indicator variable equal to 1 if the firm’s market capitalization (PRCC_F*CSHO) translated into U.S. dollars is in the top quintile by year, 0 otherwise.

HAVEN inversion and Post

HAVEN inversion is an indicator variable equal to 1 if the firm is an “inversion” firm, meaning that the firm is incorporated in a tax haven in year t and has data for at least two years pre and post tax haven incorporation, zero otherwise. Post is an indicator equal to 1 if HAVEN inversion is equal to 1 for firm-years where HAVEN is equal to 1 (after tax haven incorporation), zero otherwise.

HAVEN noninversion

An indicator variable equal to 1 if the firm is a tax haven firm-year (HAVEN = 1) and is not an “inversion” firm (HAVEN inversion = 0), zero otherwise.

Time trend

A time trend variable, calculated as the fiscal year minus the year 1990 (the first year in the sample period).

  1. Notes: I present Compustat pneumonics in parentheses. Continuous variables are winsorized at 1% and 99% unless otherwise noted
  2. aData for investor protection indices are from the World Bank websites at (Extent of Director Liability and Ease of Shareholder Suits indices for 2004 through 2013) and (Rule of Law and Control of Corruption indices for 1996 through 2013). Because these indices are stable over time, Atwood and Lewellen (2019) compute an average of the available indices for each country. The Director Liability and Ease of Shareholder Suits indices range from 0 to 10 while The Rule of Law and Control of Corruption indices range from 0 to 100. Atwood and Lewellen (2019) divide the latter two indices by 10 so that the scale is consistent across all indices
  3. bCompustat commonly classifies the accounting standard for U.S. firms in Compustat North America as “DS,” which is the same classification used for non-U.S. firms filing under non-U.S. domestic standards. I reclassify the ACCTSTD as "US" (i.e., U.S. GAAP) for U.S.-based and listed firms that are coded as "DS" (i.e., domestic standards)
  4. *Variable is constructed from data retrieved from Bureau Van Dijk, which was retrieved and measured in January 2018 and is constant over the sample period

Appendix 3: Calculation of TRANS

TRANS is my measure of earnings transparency. Barth et al. (2013) develop a firm-specific measure of the contemporaneous relation between returns and earnings. Following Barth et al. (2013), I use a two-step estimation procedure to estimate TRANS. Barth et al. (2013) estimate the first-stage regression by industry-year group. I modify this stage for an international sample by estimating the first stage by industry-year-accounting standard group using the list of accounting standard codes from Compustat.a

REI is calculated using Eq. (1a), which is estimated for each industry (Fama French 17), year, and accounting standard with at least 10 observations:

$$ {RETURN}_{ijt}={\propto}_0+{\propto}_1{E}_{ijt}+{\propto}_2\Delta {E}_{ijt}+{\varepsilon}_{it} $$



is the buy-and-hold annual return for the firm’s primary listing beginning three months after the firm’s fiscal year-end adjusted for the market return in year t in the country of primary listing. I retrieve firm-level stock price data from Compustat Global and CRSP and market-level stock price data from Datastream (country indices). Subscripts i, j, and t represent firm, industry, and year, respectively.


is earnings before extraordinary items scaled by beginning total assets.


is the change in earnings before extraordinary items from year t − 1 to year t scaled by beginning of year total assets.b

The R2 from Eq. (1a) is REI. REI measures the industry-accounting standard-specific component of the returns–earnings relation. I sort firms into four portfolios based on the residual from Eq. (1a).

I then estimate Eq. (1b) for each portfolio and year with at least 10 observations:

$$ {RETURN}_{ipt}={\propto}_0+{\propto}_1{E}_{ipt}+{\propto}_2\Delta {E}_{ipt}+{\varepsilon}_{it} $$

The R2 from Eq. (1b) is REIN, which measures the firm-specific component of transparency.

TRANS is the sum of two measures:

$$ {TRANS}_{it}={REI}_{it}+{ REI N}_{it} $$

a Upon examination of the Compustat data, in Compustat North America many U.S. firms that report using U.S. GAAP are classified as accounting standard “DS” (domestic standards), which is also used in Compustat Global for non-U.S. firms reporting under the domestic standards of the non-U.S. country. For this reason, I classify firms that are based and primarily listed in the United States with ACCTSTD code “DS” as using U.S. GAAP to ensure that the model is estimated separately for firms using U.S. GAAP and firms using local GAAP from another country.

b I scale earnings variables by total assets (rather than MVE) to ensure that the currencies in the numerator and denominator are equivalent.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Lewellen, C.M. Tax haven incorporation and financial reporting transparency. Rev Account Stud 28, 1811–1855 (2023).

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI:


JEL codes