Firm Value Effects Of Treasury Regulations

I examine the effect of administrative authority on shareholder value. Specifically, I study Treasury Regulations related to IRC ℗ʹ7874, which were intended to significantly diminish the ability of U.S. multinational companies to avoid U.S. tax through inversion. I find a negative market reaction on dates when Treasury signals it will strengthen inversion restrictions and a positive reaction when the courts overturn Treasury's attempts. Firms with high likelihood of inversion experience the strongest reaction, consistent with the market recognizing firm-level factors that make the use of this tax strategy more likely. I find that the initial notice related to the regulations elicits a stronger reaction than either the temporary or final regulations themselves. The study broadens our understanding of how shareholders react to Treasury Regulations, and how the intensity of that reaction varies along the path to enactment. It also brings some clarity to a mixed body of research regarding the economic impact of corporate inversions.