Are offshore firms worth more?

Abstract

We examine how firms' reliance on Offshore Financial Centers (OFCs), either by registering or setting up subsidiaries in OFCs, affects their financial performance. Using multilevel mixed (fixed and random) effects regressions, we provide evidence that is consistent with the agency costs of tax avoidance. Information asymmetry and lax legal environments in OFCs offset tax benefits, especially for firms directly registered in OFCs. Firms directly registered in OFCs are valued 14% lower than onshore firms, while firms with subsidiaries in OFCs enjoy an 11% higher valuation than onshore firms. However, it appears that investors do not fully appreciate the extent of the agency costs due to increased information asymmetry of firms that set up subsidiaries in OFCs. We argue that the assessment of firm value must encompass the registration status of its subsidiaries rather than the parent company's origin.