This paper conducts a study on the short and long-term equity performance of companies that have underwent corporate inversion since Section 7874, which considerably redefined the mechanisms of inversion. Prior studies have concluded only mixed market reaction to the announcement of inversion, on average, despite evidence that these transactions result in long- term effective tax rate reductions. Because equity prices should immediately correct for any changes in long-term expectations, one would expect the market to react positively to the announcements. Meanwhile, a concurrent study by Elizabeth Chorvat has identified that pre- 2004 inversions have created statistically and economically significant long-term outperformance. Many of the cost associated with inversion, especially post-2004 inversion, are difficult to accurately define. The continued prevalence of inversion, coupled with the enigmatic nature of inversions costs, suggests more recent inversions may also be mispriced. Utilizing a Fama and French 5 Factor Model, this study identifies -4.47% of average long-term annualized abnormal returns for companies that have underwent inversion since 2004. Coupled with both the positive market reaction to post-2004 inversion announcements and Chorvats findings, this suggests that the market may initially underestimate the costs of inversion associated with Section 7874 at the time of announcement.

Firms invert either through a pure inversion strategy or by merging with a foreign entity. We document that the impact of corporate inversions on the cost of equity is significantly different between the two strategies. We find that pure inversions increase the cost of equity by 10%, whereas inversions through mergers decrease it by 13%. Although both inversion strategies increase the inverting firm's shareholder value, inversions through mergers appear to create more value. However, before the tax reform of 2004, which eliminated the tax savings from pure inversions, most inversions were pure, whereas after the tax reform most were done through mergers. This finding suggests that the tax reform had an unintended consequence of reducing a managerial agency problem by eliminating the less beneficial inversion option.

This paper assesses the economic factors associated with corporate inversions, including the 48 inversions that have occurred since the analysis of Desai and Hines (2002). The analysis presented here is observational, not causal, as it examines how the business activities of firms that chose to invert changed after expatriation. In addition to statistically assessing the equity market's reaction to inversion announcements, this paper examines how firms alter their patterns of employment and investment after inversion. In particular, the paper follows how the foreign shares of an inverting firm's employment and investment change following inversion, relative to comparable non-inverting firms. The behavior of inverting firms following expatriation is assessed going back to 1980 as well as only after the 2004 policy change, which made expatriation through merger with a foreign firm with substantive foreign business activities more attractive. The results suggest that inverting firms have higher shares of the employees and capital expenditures located abroad after inversion relative to changes experienced by similar non-inverting firms. Further, these increases are not attributable to one-time changes due to the inclusion of a new foreign partner's existing workforce and ongoing investments; foreign shares of employment and investment are higher two and more years after inversion relative to the first year just after inversion when any one-time increases would register.

Corporate inversions - reorganizations that result in relocating corporate tax domiciles from the US to a foreign country - are alleged to cost the US Treasury billions of dollars in tax revenue. Contrary to these assertions, we find that that inverting firms pay no less taxes after the inversion than they did before. Moreover, contrary to the common belief, we estimate that the inversions result in US shareholders realizing $81,415.92 million in capital gains and annual increases in dividends of $9,959.37 million. Thus, paradoxically, inversions are likely to increase tax collections by the US Treasury.