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Talk softly but carry a big stick: transfer pricing penalties and the market valuation of Japanese multinationals in the United States

Author

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  • Lorraine Eden

    (Department of Management, Texas A&M University, College Station, TX, USA)

  • Luis F Juarez Valdez

    (Department of Accounting and Finance, Universidad de las Americas-Puebla, Cholula, Mexico)

  • Dan Li

    (Department of Management, Texas A&M University, College Station, TX, USA)

Abstract

Corporate income tax law in OECD countries requires multinational enterprises (MNEs) to set their transfer prices according to the arm's length standard. In 1990 the United States (US) government introduced a transfer pricing penalty for cases where MNEs deviated substantially from this standard. More than two dozen other governments have followed suit. Our paper uses event study methodology to assess the impact of the US transfer pricing penalty on the stock market valuation of Japanese MNEs with US subsidiaries in the 1990s. We find that the penalty caused a drop in their cumulative market value of $56.1 billion, representing 12.6% of their 1997 market value. Journal of International Business Studies (2005) 36, 398–414. doi:10.1057/palgrave.jibs.8400141

Suggested Citation

  • Lorraine Eden & Luis F Juarez Valdez & Dan Li, 2005. "Talk softly but carry a big stick: transfer pricing penalties and the market valuation of Japanese multinationals in the United States," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 36(4), pages 398-414, July.
    • Handle: RePEc:pal:jintbs:v:36:y:2005:i:4:p:398-414
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    Citations

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    Cited by:

    1. Devereux, Michael P. & Fuest, Clemens & Lockwood, Ben, 2015. "The taxation of foreign profits: A unified view," Journal of Public Economics, Elsevier, vol. 125(C), pages 83-97.
    2. Beugelsdijk, Sjoerd & Pedersen, Torben & Petersen, Bent, 2009. "Is there a trend towards global value chain specialization? -- An examination of cross border sales of US foreign affiliates," Journal of International Management, Elsevier, vol. 15(2), pages 126-141, June.
    3. repec:csg:ajrcwp:03 is not listed on IDEAS
    4. Kazuki Onji, 2013. "Who participates in corporate income tax consolidation? Evidence from Japan," AJRC Working Papers 1303, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
    5. Lorraine Eden & Stewart R. Miller & Sarfraz Khan & Robert J. Weiner & Dan Li, 2022. "The event study in international business research: Opportunities, challenges, and practical solutions," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 53(5), pages 803-817, July.
    6. Vaaler, Paul M. & Schrage, Burkhard N., 2007. "Residual State Factors, Policy Stability and Financial Performance Following Strategic Decisions by Privatizing Telecoms," Working Papers 07-0102, University of Illinois at Urbana-Champaign, College of Business.
    7. Sikka, Prem & Willmott, Hugh, 2010. "The dark side of transfer pricing: Its role in tax avoidance and wealth retentiveness," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 21(4), pages 342-356.
    8. Sjoerd Beugelsdijk & Jean-François Hennart & Arjen Slangen & Roger Smeets, 2010. "Why and how FDI stocks are a biased measure of MNE affiliate activity," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 41(9), pages 1444-1459, December.
    9. Lorraine Eden & Charles F. Hermann & Stewart R. Miller, . "Evidence-based policymaking in a VUCA world," UNCTAD Transnational Corporations Journal, United Nations Conference on Trade and Development.
    10. Cooper, Maggie & Nguyen, Quyen T.K., 2019. "Understanding the interaction of motivation and opportunity for tax planning inside US multinationals: A qualitative study," Journal of World Business, Elsevier, vol. 54(6), pages 1-1.
    11. Richardson, Grant & Taylor, Grantley & Lanis, Roman, 2013. "Determinants of transfer pricing aggressiveness: Empirical evidence from Australian firms," Journal of Contemporary Accounting and Economics, Elsevier, vol. 9(2), pages 136-150.
    12. Cuervo-Cazurra, Alvaro & Dieleman, Marleen & Hirsch, Paul & Rodrigues, Suzana B. & Zyglidopoulos, Stelios, 2021. "Multinationals’ misbehavior," Journal of World Business, Elsevier, vol. 56(5).
    13. Eden, Lorraine & Indro, Daniel C. & Miller, Stewart R. & Richards, Malika, 2021. "Valuation uncertainty, home and host market uncertainty, and cross-border seasoned equity offerings," International Business Review, Elsevier, vol. 30(3).
    14. Aleksi Eerola & Arjen H. L. Slangen, 2022. "A Review of International Management Research on Corporate Taxation," Management International Review, Springer, vol. 62(5), pages 643-680, October.

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