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Taxing away M&A: Capital gains taxation and acquisition activity

Author

Listed:
  • Todtenhaupt, Maximilian
  • Voget, Johannes
  • Feld, Lars P.
  • Ruf, Martin
  • Schreiber, Ulrich

Abstract

Capital gains taxation distorts the market for corporate control by imposing a cost on selling shareholders in acquisitions. This lock-in effect increases premiums required for deal completion preventing some M&As from taking place at all. We estimate the effect of capital gains taxation on the quantity of realized M&A deals and compute the deadweight loss related to taxing these transactions. We find that a one percentage point increase in the capital gains tax rate reduces acquisition activity by around 1% annually. For the United States, this implies unrealized synergy gains of $9.3 billion each year due to capital gains taxes. (c) 2020 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY license. (http://creativecommons.org/licenses/by/4.0/ )

Suggested Citation

  • Todtenhaupt, Maximilian & Voget, Johannes & Feld, Lars P. & Ruf, Martin & Schreiber, Ulrich, 2020. "Taxing away M&A: Capital gains taxation and acquisition activity," Munich Reprints in Economics 84733, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:84733
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    Cited by:

    1. Sebastien Bradley & Federico Carril-Caccia & Yoto V. Yotov, 2025. "Reassessing the Effects of Corporate Income Taxes on Mergers and Acquisitions Using Empirical Advances in the Gravity Literature," National Tax Journal, University of Chicago Press, vol. 78(4), pages 821-861.
    2. Harald J. Amberger & Leslie Robinson, 2024. "The initial effect of U.S. tax reform on foreign acquisitions," Review of Accounting Studies, Springer, vol. 29(2), pages 996-1038, June.
    3. Burra, Lavan T. & Sommer, Stephan & Vance, Colin, 2023. "Free-Ridership in Subsidies for Company- and Private Electric Vehicles," Ruhr Economic Papers 1015, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    4. Havlik, Annika, 2020. "Political budget cycles in European public procurement," ZEW Discussion Papers 20-069, ZEW - Leibniz Centre for European Economic Research.
    5. Bradley, Sebastien & Robinson, Leslie & Ruf, Martin, 2021. "The impact of IP box regimes on the M&A market," Journal of Accounting and Economics, Elsevier, vol. 72(2).
    6. Lester, Rebecca & Olbert, Marcel, 2025. "Firms’ real and reporting responses to taxation: A review," Journal of Accounting and Economics, Elsevier, vol. 80(2).
    7. J. M. C. Santos Silva & Silvana Tenreyro, 2022. "The Log of Gravity at 15," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 21(3), pages 423-437, September.
    8. Axel Prettl & Dominik Hagen, 2023. "Multinational ownership patterns and anti-tax avoidance legislation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(3), pages 565-634, June.
    9. Suman Lodh & Nitin Deshmukh & Alireza Rohani, 2024. "Stemming the tide: Does climate risk affect M&A performance?," Business Strategy and the Environment, Wiley Blackwell, vol. 33(2), pages 858-881, February.
    10. Burra, Lavan T. & Sommer, Stephan & Vance, Colin, 2024. "Free-ridership in subsidies for company- and private electric vehicles," Energy Economics, Elsevier, vol. 131(C).
    11. Vera Z. Eichenauer & Feicheng Wang, 2024. "Mild Deglobalization: Foreign Investment Screening and Cross-Border Investment," CESifo Working Paper Series 11538, CESifo.
    12. Maximilian Todtenhaupt & Johannes Voget, 2021. "International Taxation and Productivity Effects of M&As," CESifo Working Paper Series 8967, CESifo.
    13. Yin, Zhichao & Peng, Hongfeng & Xiao, Weiguo & Xiao, Zumian, 2022. "Capital control and monetary policy coordination: Tobin tax revisited," Research in International Business and Finance, Elsevier, vol. 59(C).
    14. Annika Havlik & Friedrich Heinemann & Justus Nover, 2021. "Election Cycles in European Public Procurement," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 77(4), pages 376-407.
    15. Natarajan Balasubramanian & Jagadeesh Sivadasan & Wenjian Xu, 2024. "Caveat emptor as an obstacle to business transfers: Effect of product line liability exceptions on acquisitions, entry, and exit," Strategic Management Journal, Wiley Blackwell, vol. 45(7), pages 1300-1325, July.
    16. Todtenhaupt, Maximilian & Voget, Johannes, 2021. "International taxation and productivity effects of M&As," Journal of International Economics, Elsevier, vol. 131(C).
    17. Kumar, Deepak & Sengupta, Keya & Bhattacharya, Mousumi, 2023. "Macroeconomic influences on M&A deal outcomes: An analysis of domestic and cross-border M&As in developed and emerging economies," Journal of Business Research, Elsevier, vol. 161(C).

    More about this item

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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