Does Target Tax Aggressiveness Matter in Corporate Takeovers?

Abstract:     
In this paper we investigate whether tax avoidance has an effect on M&A terms. We find that tax aggressiveness of target firms negatively affects acquisition premiums paid by acquirers. The effect is concentrated in opaque targets or targets that are from less competitive industries, when acquirers hire a top-tier financial advisor, and in the period after the 2003 regulatory changes took effect to curb abusive tax shelters. In addition, target firms with a higher level of tax aggressiveness are more likely to receive a downward adjustment to the initial offer price. Last, we show that public acquirers are more likely to use stock as the currency for acquiring tax aggressive targets. Taken together, our evidence suggests that tax aggressiveness has a measurable adverse effect on shareholder value in an M&A deal.

Number of Pages in PDF File: 50

Keywords: M&As, Tax aggressiveness, tax avoidance, due diligence, acquisition premium

JEL Classification: G32, G34, H26

working papers series