Targets' Tax Shelter Participation and Takeover Premiums

Travis CHOW, Singapore Management University
Ken KLASSEN, University of Waterloo
Yanju LIU, Singapore Management University


This paper examines the effect of targets’ participation in tax shelters on takeover premiums in mergers and acquisitions. Using a novel dataset in which targets disclose that they have not participated in tax shelters, we find that targets that make this statement in their merger filings are associated with 4.6 percent higher takeover premiums, on average. This relation is consistent with acquirers being are concerned about the potential future liabilities when targets have engaged in tax sheltering. Consistent with this interpretation, the positive association between targets’ non sheltering disclosure and acquisition premiums is stronger for less tax aggressive acquirers. This paper demonstrates the importance of targets’ aggressive tax positions in the determination of premiums offered to targets’ shareholders.