Anticipated Tax Planning as a Source of Merger Gains
This paper was also presented at the 2013 American Accounting Association Annual Meeting held in Anaheim, California, USA.
Abstract
This paper investigates whether and how the tax aggressiveness of acquirers and targets affects shareholder wealth. I find that acquisitions of more tax aggressive targets by less tax aggressive acquirers generate significantly lower acquisition gains. I also find weak evidence that acquisitions of less tax aggressive targets by more tax aggressive acquirers generate higher acquisition gains. Additional analyses reveal that the acquirer’s governance is a significant determinant of shareholder wealth effects of tax aggressiveness transfer. Specifically, I find that, when acquirers are well-governed, acquisitions of less (more) tax aggressive targets by more (less) tax aggressive acquirers are value-enhancing (value-destroying). My findings are robust to various measures of tax aggressiveness. This paper contributes to the tax aggressiveness literature by showing that the relative tax aggressiveness of the acquirer and target is a significant determinant of value creation or destruction in M&A.