Real Effects of International Tax Avoidance: Domestic Acquisitions
Abstract
In this study, we examine the real effects of international tax avoidance incentives on corporate decisions in the context of domestic mergers and acquisitions. Specifically, we examine whether U.S. acquirers take the U.S. targets’ subsidiary presence in tax havens into account when making acquisition decisions. By acquiring a target, the acquirer not only gains control of the target but also of the target’s subsidiaries located in tax haven jurisdictions. Using disclosed material subsidiary data to identify firms’ subsidiary presence in tax havens, we develop two measures of tax haven subsidiary relatedness between the acquirer and its target and examine the association between the probability of merger pair formation and the tax haven subsidiary relatedness measures. The results suggest that acquirers are more likely to select targets whose subsidiaries are located in tax havens similar to their own, consistent with the economies of scale in tax planning hypothesis. This study contributes to the tax avoidance literature by documenting evidence regarding the important role of U.S. firms’ tax haven subsidiary presence in domestic mergers and acquisitions.