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Working Paper

The authors 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.

The authors 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.

The authors 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.

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