Shareholder Wealth Effects of Tax Aggressiveness Transfer
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.