The Value Of Offshore Secrets – Evidence From The Panama Papers

James O’Donovan

Hannes F. Wagner
Bocconi University – Department of Finance; Bocconi University – IGIER – Innocenzo Gasparini Institute for Economic Research

Stefan Zeume
University of Michigan, Stephen M. Ross School of Business

April 27, 2016


We use the data leak of the Panama Papers on April 3, 2016 to study whether and how the use of offshore vehicles affects valuation around the world. The data leak made transparent the operations of more than 214,000 shell companies incorporated in tax havens by Panama-based law firm Mossack Fonseca. The Panama Papers implicate a wide range of firms, politicians, and other individuals around the globe to have used secret offshore vehicles. Allegations include tax evasion, financing corruption, money laundering, violation of sanctions, and hiding other activities. We find that, around the world, the data leak erased an unprecedented risk-adjusted US$230 billion in market capitalization among 1,105 firms with exposure to the revelations of the Panama Papers. Firms with subsidiaries in Panama, the British Virgin Islands, the Bahamas, or the Seychelles – representing 90% of the tax havens used by Mossack Fonseca – experienced an average drop in firm value of 0.5%-0.6% around the data leak. We also find that firms operating in perceivably corrupt countries – particularly in those where high-ranked government officials were implicated by name in the leaked data – suffered a similar decline in firm value. Further, firms operating both in Mossack Fonseca’s primary tax havens and in countries with implicated politicians experienced the largest negative abnormal returns. For instance, firms linked to Mossack Fonseca’s tax havens and operating in Iceland experienced negative abnormal returns of -1.4%; the data leak revealed that Iceland’s Prime Minister failed to disclose beneficial interest in a British Virgin Islands incorporated shell company. Overall, our estimates suggest that investors perceive the leak to destroy some of the value generated from offshore activity.

The Value Of Offshore Secrets – Evidence From The Panama Papers – Introduction

On April 3, 2016, news sources around the world started reporting about a data leak of confidential documents concerning the business activities of Mossack Fonseca, a Panama-based law firm and provider of corporate services. These so-called Panama Papers comprised 11.5 million emails, contracts, transcripts and scanned documents, and constituted the largest data leak to date. However, the contents of the leak, rather than its sheer size – 2.6 terabytes of data, equivalent to roughly 168 million pages of text – make it significant. The leaked documents provided insights into the uses of more than 214,000 shell companies during the past 45 years. According to Mossack Fonseca’s internal documents – also leaked – 95% of the company’s work consisted of “selling [corporate] vehicles to avoid taxes”.

The use of offshore corporate vehicles to avoid or evade taxes, facilitate corruption, launder money, violate sanctions, and avoid detection of other activities is well known. However, due to their intransparent nature, an analysis of the actual uses of offshore vehicles and of the value they create for shareholders has been challenging in the past, both for governments and researchers.

In this paper, we use the data leak of the Panama Papers to study, around the world, whether and how the use of offshore vehicles affects valuation and corporate decisions. In theory, the unexpected data leak might reduce or increase firm value generated from offshore vehicles. The leak might negatively affect value if it makes it harder to avoid future taxes or to use offshore money to bribe foreign government officials. The same applies if the leak increases expected costs of regulatory punishment for past tax evasion and violations of anti-bribery regulation. Additionally, reputational damage may arise from the revelations. However, if offshore structures were used to tunnel resources out of the firm at the expense of minority shareholders, the leak might increase the costs of such activities, thereby increasing firm value.

Panama Papers

We use a sample of 26,655 publicly traded firms from 73 countries, with a total of 543,151 subsidiaries across 213 sovereign and non-sovereign territories, to assess the impact of the Panama Papers data leak on firm value. We measure firm value by returns and abnormal returns to the announcement of the data leak around April 3, 2016.

Our results show that, across countries, the data leak wiped out a total of $ 222-230 billion in market capitalization among firms with exposure to the revelations of the Panama Papers.2 Around the data leak, an average firm with exposure to the Panama Papers – by having subsidiaries in the main tax havens used by Mossack Fonseca – experiences a drop in firm value of 0.5 to 0.6 percent relative to same-country same-industry firms without such exposure. These returns persist over alternative event windows, are robust to adjusting for market movements and market risk exposure, and are statistically significant at the 1% level throughout.

Next, we consider firms’ exposure to individual tax havens implicated by the Panama Papers. Of the 214,000 companies that appear in Mossack Fonseca’s files, 90 percent were incorporated in just four tax havens – the British Virgin Islands (BVI) (114,000 firms), Panama (48,000), the Bahamas (16,000), and the Seychelles (15,000).3 We find negative and strongly significant abnormal returns for exposure to three of these tax havens. Firms exposed to the Bahamas lose 1.3% in value, followed by firms exposed to Panama (-0.8%) and BVI (-0.7%). We then turn to the impact of the data leak on firms with exposure to perceivably corrupt regions. Firms having subsidiaries in countries perceived to be more corrupt than their home country experience 0.3% lower returns than same-industry, same-country firms without this exposure. Also, the impact of the data leak is more pronounced for firms that have activities in countries whose high-ranked government officials were implicated by name in news stories of suspected fraud, money laundering, bribes, or related activities immediately following the leak. These countries are Iceland, Argentina, Georgia, Iraq, Jordan, Qatar, Saudia Arabia, Sudan, United Arab Emirates, and Ukraine.4 Firms with at least one subsidiary in any of these 10 countries experienced average abnormal returns of -0.65%.

Panama Papers

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