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Taxes and the Merger Decision: An Empirical Analysis

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  • Alan J. Auerbach
  • David Reishus

Abstract

One motive that is often cited for merger activity is the avoidance of federal income taxes by corporations and their shareholders. Yet there is little empirical evidence on the tax consequences of merger activity, or on the postmerger effects on firm policies of tax motivated mergers. In this paper, we present some initial results based on a large sample of mergers and acquisitions that occurred over the period 1968-83. We find that, in about one fifth of all mergers, there was a potential gain from the transfer of unused tax losses and credits, with an average value of approximately ten percent of the acquired company's market value. Other tax incentives to merge are also measured, but found to be less important quantitatively.

Suggested Citation

  • Alan J. Auerbach & David Reishus, 1986. "Taxes and the Merger Decision: An Empirical Analysis," NBER Working Papers 1855, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1855
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    File URL: http://www.nber.org/papers/w1855.pdf
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    1. Auerbach, Alan J, 1981. "Inflation and the Tax Treatment of Firm Behavior," American Economic Review, American Economic Association, vol. 71(2), pages 419-423, May.
    2. Alan J. Auerbach & James R. Hines Jr., 1986. "Tax Reform, Investment, and the Value of the Firm," NBER Working Papers 1803, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Alan J. Auerbach & David Reishus, 1987. "The Impact of Taxation on Mergers and Acquisitions," NBER Chapters,in: Mergers and Acquisitions, pages 69-86 National Bureau of Economic Research, Inc.
    2. Groh, Alexander P. & Henseleit, Christoph, 2009. "The valuation of tax shields induced by asset step-ups in corporate acquisitions," IESE Research Papers D/785, IESE Business School.
    3. Modén, Karl-Markus, 1989. "Taxes and Mergers in Sweden," Working Paper Series 242, Research Institute of Industrial Economics.

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