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Reassessing the Effects of Corporate Income Taxes on Mergers and Acquisitions Using Empirical Advances in the Gravity Literature

Author

Listed:
  • Sebastien Bradley

    (Drexel University)

  • Federico Carril-Caccia

    (University of Granada)

  • Yoto Yotov

    (Drexel University)

Abstract

We study the relationship between corporate income taxes and mergers and acquisitions (M&As). To this end, we compile and deploy a dataset consisting of all cross-border and domestic M&A deals for 118 source (acquirer) and 122 destination (target) countries and 84 sectors over the period 1995-2019. From a methodological perspective, we implement leading methods from the empirical gravity literature on trade, foreign direct investment, and migration, and we demonstrate their importance for estimating the impact of corporate income taxes on cross-border versus domestic M&A activity. Our main finding is that a one percentage point increase in target country corporate income tax rates decreases the number of cross-border acquisitions by about 0.8 percent relative to domestic M&As. This result is robust to various sensitivity checks and is comparable to previously published estimates. Nevertheless, our stepwise estimation strategy exemplifies the importance of individual empirical refinements. These should serve as the basis for future work investigating the effects of taxation on bilateral flows.

Suggested Citation

  • Sebastien Bradley & Federico Carril-Caccia & Yoto Yotov, 2023. "Reassessing the Effects of Corporate Income Taxes on Mergers and Acquisitions Using Empirical Advances in the Gravity Literature," School of Economics Working Paper Series 2023-8, LeBow College of Business, Drexel University.
    • Handle: RePEc:ris:drxlwp:2023_008
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    Cited by:

    1. Camarero, Mariam & Muñoz, Alejandro & Tamarit, Cecilio, 2025. "Unveiling the drivers of portfolio equity and bond investment in the European Union: The interplay of tax havens and gravity factors," European Economic Review, Elsevier, vol. 179(C).
    2. Clara Brandi & Federico Carri-Caccia, 2025. "Preventing pollution havens? Environmental Provisions in Preferential Trade Agreements and Foreign Direct Investment," Working Papers 202513, Center for Global Policy Analysis, LeBow College of Business, Drexel University.
    3. Mario Larch & Serge Shikher & Yoto V. Yotov, 2025. "Estimating Gravity Equations: Theory Implications, Econometric Developments, and Practical Recommendations," Review of International Economics, Wiley Blackwell, vol. 33(5), pages 1066-1092, November.

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    Keywords

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    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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