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The Effects of Taxation on the Merger Decision

In: Corporate Takeovers: Causes and Consequences

  • Alan J. Auerbach
  • David Reishus

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, December.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 2056.
    Handle: RePEc:nbr:nberch:2056
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    1. Alan J. Auerbach & James R. Hines Jr., 1986. "Anticipated Tax Changes and the Timing of Investment," NBER Working Papers 1886, National Bureau of Economic Research, Inc.
    2. Alan J. Auerbach & James M. Poterba, 1987. "Tax Loss Carryforwards and Corporate Tax Incentives," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 305-342 National Bureau of Economic Research, Inc.
    3. 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.
    4. King, Mervyn A, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 21-35, January.
    5. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
    6. Auerbach, Alan J, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 433-46, August.
    7. 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.
    8. Roger H. Gordon & James R. Hines Jr. & Lawrence H. Summers, 1986. "Notes on the Tax Treatment of Structures," NBER Working Papers 1896, National Bureau of Economic Research, Inc.
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