Among industrialized countries, the United States has the highest official corporate tax rate and one of the highest effective tax rates. To take advantage of lower taxes in other countries, some U.S. firms elect to sell themselves to smaller foreign firms, a process called “inversion.”

For shareholders of those firms, the tax consequences of inversions are complicated. Some are harmed by the move while others benefit. Individual shareholders, who own shares in taxable accounts, are taxed on the increased value of their shares. This can result in different tax outcomes from inversions for shareholders who have held the stock for a long time prior to the inversion and short-term shareholders (including corporate officers exercising company stock options).

In the summer issue of Regulation, I described a new research paper that investigates 73 inversions that occurred from 1983 to 2014. For those investors who had owned stock for three years, half of the inversions resulted in a negative return. So if many long-term shareholders lose money on inversions, why do they occur?

The answer appears to be that corporate executives gain from inversions even if shareholders lose. The return earned by CEOs of inverted companies is different than the return of average shareholders if the CEOs have stock options. Inversion does not result in capital gain taxation of exercised options. Thus inversions can be more rewarding for CEOs than long-term investors. The paper’s authors show that the higher the option compensation of a CEO, the greater the likelihood of an inversion.

Put simply, the CEO has incentives that are not well-aligned with long-term shareholders. That likely means that current proposals to combat inversions by raising taxes on inverting firms will not have the intended effect; though shareholders would be further harmed by the tax penalties, the CEOs would still have incentives to invert.

The authors of the research paper had a recent op-ed in the New York Times about their work. They call for lower corporate tax rates and an end to the rules that were intended to reduce inversions but have only hurt long-term shareholders.