Does Target Tax Aggressiveness Matter in Corporate Takeovers?
Washington University in Saint Louis - Olin School of Business
The Chinese University of Hong Kong (CUHK) - Department of Finance
Faculty of Business and Economics, University of Hong Kong
We examine whether tax avoidance of target firms affects takeover outcomes. We find that acquirers pay significantly lower premiums to tax aggressive targets. This negative effect is concentrated in acquisitions of opaque targets and targets operating in less competitive industries, and in acquisitions in which the acquirer hires a top-tier financial advisor. In addition, we find that target firms with a higher level of tax aggressiveness are more likely to receive a downward adjustment to the initial offer price. We also find that public acquirers are more likely to use stock as the currency when acquiring tax aggressive targets. Overall, our evidence suggests that acquirers perceive tax aggressiveness of target firms as a potential risk and price protect against this risk accordingly.
Number of Pages in PDF File: 54
Keywords: M&As, Tax aggressiveness, tax avoidance, due diligence, acquisition premium
JEL Classification: G32, G34, H26working papers series
Date posted: December 21, 2012 ; Last revised: November 16, 2013
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