Differences in the reported performances of foreign-controlled and domestically-controlled firms : some UK evidence

Abstract

This study provides empirical evidence on the relative performances of Foreign Controlled Domestic Companies operating in the United Kingdom as compared to those of United Kingdom Controlled Domestic Dompanies. One hundred and fifty (150) Foreign Controlled Domestic Companies, selected from the Times 1000 (1995), were matched with 150 United Kingdom Domestic Companies on the bases of size and industry. The reported performance data of the two sub samples for five years were extracted from the FT Extel secured database. Statistical tests were then carried out, on five year average and annual bases, to establish whether there were differences in the performances of the two groups of firms. Results revealed statistically significant differences in the reported performances of Foreign Controlled Domestic Companies and United Kingdom Domestic Companies operating in the United Kingdom over the five year period. Foreign controlled firms significantly under performed United Kingdom Domestic Companies of comparable size and industry. The lower profitability figures reported by these firms were partly as a result of higher trading expenses. The study also found differences in the year to year magnitude of under performance by Foreign Controlled Domestic Companies. While findings in this study corroborate those of earlier United States based studies, the management and owners of Foreign Controlled Domestic Companies’ parents should be interested in the apparent underperformance of their United Kingdom based assets. It is possible, however, that the figures reported do not reflect real asset performance. In which case, the United Kingdom tax authorities may want to take a closer look at Foreign Controlled Domestic Ccompanies’ reported performances to establish whether they are the outcome of income shifting practices. Future studies could examine how the performances of the managers of these foreign located assets are evaluated and rewarded and explore other possible explanatory factors for their reported under performance.