IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/2192.html
   My bibliography  Save this paper

The Effects of Taxation on the Merger Decision

Author

Listed:
  • 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.

Suggested Citation

  • Alan J. Auerbach & David Reishus, 1987. "The Effects of Taxation on the Merger Decision," NBER Working Papers 2192, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2192
    Note: PE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w2192.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bradford, David F., 1981. "The incidence and allocation effects of a tax on corporate distributions," Journal of Public Economics, Elsevier, vol. 15(1), pages 1-22, February.
    2. 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.
    3. Andrei Shleifer & Lawrence H. Summers, 1988. "Breach of Trust in Hostile Takeovers," NBER Chapters,in: Corporate Takeovers: Causes and Consequences, pages 33-68 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: The Effects of Taxation on Capital Accumulation, pages 163-200 National Bureau of Economic Research, Inc.
    5. 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.
    6. Julian R. Franks & Robert S. Harris & Cohn Mayer, 1988. "Means of Payment in Takeovers: Results for the United Kingdom and the United States," NBER Chapters,in: Corporate Takeovers: Causes and Consequences, pages 221-264 National Bureau of Economic Research, Inc.
    7. Mervyn A. King, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 21-35.
    8. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
    9. Alan J. Auerbach, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 433-446.
    10. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Auerbach, Alan J., 2002. "Taxation and corporate financial policy," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 19, pages 1251-1292 Elsevier.
    2. 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.
    3. Rosanne Altshuler & Alan J. Auerbach, 1990. "The Significance of Tax Law Asymmetries: An Empirical Investigation," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 61-86.
    4. Hines Jr., James R., 2010. "Income misattribution under formula apportionment," European Economic Review, Elsevier, vol. 54(1), pages 108-120, January.
    5. 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.
    6. Bronwyn H. Hall, 1988. "The Effect of Takeover Activity on Corporate Research and Development," NBER Chapters,in: Corporate Takeovers: Causes and Consequences, pages 69-100 National Bureau of Economic Research, Inc.
    7. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    8. Mihir A. Desai & William M. Gentry, 2004. "The Character and Determinants of Corporate Capital Gains," NBER Chapters,in: Tax Policy and the Economy, Volume 18, pages 1-36 National Bureau of Economic Research, Inc.
    9. B. Douglas Bernheim, 1989. "Incentive Effects of the Corporate Alternative Minimum Tax," NBER Chapters,in: Tax Policy and the Economy, Volume 3, pages 69-96 National Bureau of Economic Research, Inc.
    10. Burch, Timothy R. & Nanda, Vikram & Silveri, Sabatino, 2012. "Taking stock or cashing in? Shareholder style preferences, premiums and the method of payment," Journal of Empirical Finance, Elsevier, vol. 19(4), pages 558-582.
    11. James R. Hines Jr., 1998. "Investment Ramifications of Distortionary Tax Subsidies," NBER Working Papers 6615, National Bureau of Economic Research, Inc.
    12. 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.
    13. Franks, Julian R & Harris, Robert & Mayer, Colin, 1987. "Means of Payment in Takeovers: Results for the UK and US," CEPR Discussion Papers 200, C.E.P.R. Discussion Papers.
    14. Alan J. Auerbach, 1989. "Tax policy and corporate borrowing," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 33, pages 136-172.
    15. 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.
    16. repec:bin:bpeajo:v:21:y:1990:i:1990-3:p:1-84 is not listed on IDEAS
    17. 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.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2192. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.