Talk Softly But Carry a Big Stick: Transfer Pricing Penalties and the Marekt Valuation of Japanese Multinationals in the United States

Journal of International Business Studies, Forthcoming

34 Pages Posted: 2 Jun 2005

See all articles by Lorraine Eden

Lorraine Eden

Dept of Management, Mays Business School, Texas A&M University ; School of Law, Texas A&M University

Dan Li

Texas A&M University

Luis Felipe Juarez-Valdes

Universidad de Las Americas-Puebla

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 US government introduced a transfer pricing penalty for cases where MNEs deviated substantially from this standard. Most OECD governments have followed with their own penalty legislation. This paper investigates the theoretical and empirical effects of transfer pricing penalties on the behavior and profits of multinationals. Event study methodology is used to analyze the effects of the US penalty legislation on the stock market valuation of Japanese MNEs with US subsidiaries. We find that even the threat of the penalty negatively affected market valuation.

Keywords: Transfer pricing, tax penalty, tax avoidance, market valuation, corporate income tax, intrafirm trade, Japanese multinationals, Internal Revenue Service

JEL Classification: E62, F21, F23, H25, H26, K34, L62

Suggested Citation

Eden, Lorraine and Li, Dan and Juarez-Valdes, Luis Felipe, Talk Softly But Carry a Big Stick: Transfer Pricing Penalties and the Marekt Valuation of Japanese Multinationals in the United States. Journal of International Business Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=733844

Lorraine Eden (Contact Author)

Dept of Management, Mays Business School, Texas A&M University ( email )

Dept of MGMT, TAMU 4221
College Station, TX 77843-4221
United States
979-777-3489 (Phone)

HOME PAGE: http://mays.tamu.edu/mgmt/

School of Law, Texas A&M University ( email )

1515 Commerce St.
Fort Worth, TX Tarrant County 76102
United States
9797773489 (Phone)

Dan Li

Texas A&M University ( email )

Langford Building A
798 Ross St.
College Station, TX 77843-3137
United States

Luis Felipe Juarez-Valdes

Universidad de Las Americas-Puebla

Department of Accounting
Puebla 72820
MEXICO

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