Does Target Tax Aggressiveness Matter in Corporate Takeovers?

Abstract

We examine whether tax avoidance of target firms affects takeover pricing. We find that acquirers pay lower premiums to tax aggressive targets, and this effect is concentrated in acquisitions of targets operating in less competitive industries that are prone to managerial agency problems and in acquisitions in which the acquirer hires a top-tier financial advisor. In addition, tax aggressive targets are more likely to receive a downward adjustment to the initial offer price, and are more likely to be paid with acquirers’ stock. Overall, our evidence suggests that acquirers are concerned about tax avoidance in target firms, and therefore, corporate tax avoidance entails a cost for shareholders in the form of a lower premium in takeovers.

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

JEL Classification: G32, G34, H26