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The Effects of Taxation on the Merger Decision

In: Corporate Takeovers: Causes and Consequences

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  • Alan J. Auerbach
  • David Reishus

Abstract

This paper presents estimates of the tax benefits generated by a sample of U.S. mergers and acquisitions involving two public corporations over the period 1968-83 and estimates a "marriage model" based on differences between these mergers and another sample of "pseudomergers" that did not occur to determine the impact of these tax benefits on the probability of two firms combining. Our findings reject the hypothesis that leverage played a large role in fostering these transactions, and that the tax losses and credits of acquired firms likewise exerted no impact on merger activity. Though the use of such benefits by acquiring firms to shield profits of other firms did increase the level of activity, the impact was quite small. On the whole, our results suggest that the changes in tax provisions with respect to mergers introduced by the Tax Reform Act of 1986 will have a small impact on U.S. mergers and acquisitions.

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This chapter was published in:

  • Alan J. Auerbach, 1988. "Corporate Takeovers: Causes and Consequences," NBER Books, National Bureau of Economic Research, Inc, number auer88-1, July.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 2056.

    Handle: RePEc:nbr:nberch:2056

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    References

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    1. Roger H. Gordon & James R. Hines, Jr. & Lawrence H. Summers, 1987. "Notes on the Tax Treatment of Structures," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 223-258 National Bureau of Economic Research, Inc.
    2. David F. Bradford, 1979. "The Incidence and Allocation Effects of a Tax on Corporate Distributions," NBER Working Papers 0349, National Bureau of Economic Research, Inc.
    3. Alan J. Auerbach, 1980. "Wealth Maximization and the Cost of Capital," NBER Working Papers 0254, National Bureau of Economic Research, Inc.
    4. Alan J. Auerbach & James R. Hines, Jr., 1987. "Anticipated Tax Changes and the Timing of Investment," NBER Chapters, in: Taxes and Capital Formation, pages 85-92 National Bureau of Economic Research, Inc.
    5. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
    6. Palepu, Krishna G., 1986. "Predicting takeover targets : A methodological and empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 8(1), pages 3-35, March.
    7. Alan J. Auerbach & James M. Poterba, 1986. "Tax Loss Carryforwards and Corporate Tax Incentives," Working papers 413, Massachusetts Institute of Technology (MIT), Department of Economics.
    8. King, Mervyn A, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 21-35, January.
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    Cited by:
    1. James R. Hines, Jr., 2009. "Income Misattribution under Formula Apportionment," NBER Working Papers 15185, National Bureau of Economic Research, Inc.
    2. Alan J. Auerbach, 2001. "Taxation and Corporate Financial Policy," NBER Working Papers 8203, National Bureau of Economic Research, Inc.
    3. Rauh, Joshua D., 2006. "Own company stock in defined contribution pension plans: A takeover defense?," Journal of Financial Economics, Elsevier, vol. 81(2), pages 379-410, August.
    4. James R. Hines Jr., 1998. "Investment Ramifications of Distortionary Tax Subsidies," NBER Working Papers 6615, National Bureau of Economic Research, Inc.
    5. Desai, Mihir A. & Hines Jr., James R., 2008. "Market reactions to export subsidies," Journal of International Economics, Elsevier, vol. 74(2), pages 459-474, March.
    6. Roger H. Gordon & Jeffrey K. MacKie-Mason, 1990. "Effects of the Tax Reform Act of 1986 on Corporate Financial Policy and Organizational Form," NBER Working Papers 3222, National Bureau of Economic Research, Inc.
    7. Robert S. Harris & Julian Franks & Colin Mayer, 1987. "Means of Payment in Takeovers: Results for the U.K. and U.S," NBER Working Papers 2456, National Bureau of Economic Research, Inc.
    8. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    9. Rosanne Altshuler & Alan J. Auerbach, 1987. "The Significance of Tax Law Asymmetries: An Empirical Investigation," NBER Working Papers 2279, National Bureau of Economic Research, Inc.
    10. Vishny, Robert W. & Bhagat, Sanjai & Shleifer, Andrei, 1990. "Hostile Takeovers in the 1980s: The Return to Corporate Specialization," Scholarly Articles 8705861, Harvard University Department of Economics.
    11. Bronwyn H. Hall, 1987. "The Effect of Takeover Activity on Corporate Research and Development," NBER Working Papers 2191, National Bureau of Economic Research, Inc.
    12. Ghosh, Aloke & Jain, Prem C., 2000. "Financial leverage changes associated with corporate mergers," Journal of Corporate Finance, Elsevier, vol. 6(4), pages 377-402, December.

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