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

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.