Why do companies reincorporate abroad? Evidence from Europe

We take advantage of the institutional, fiscal, and regulatory differences across European countries to investigate why firms decide to reincorporate. Reincorporations within Europe have become increasingly common over the last decade, with Italy experiencing the largest outflow of firms and the Netherlands being the preferred destination. We investigate the expansion, tax saving, and regulatory arbitrage explanations. The evidence does not support the expansion and tax saving motivations as we observe no significant changes in firms' investments and effective tax rates. On the other hand, we find that firms reincorporate in countries with a permissive legislative approach towards the adoption of control-enhancing mechanisms, as predicted by the regulatory arbitrage explanation. This is especially the case of Italian firms reincorporating in the Netherlands as they implement a degree of separation between ownership and control that goes beyond what their country of origin would allow. We discuss the governance implications of such decision.