Tax Benefit Preservation Plans
Thomas Jason Boulton
April 1, 2015
We study the rise of shareholder right plans aimed at protecting a firm’s net operating loss carryforwards (tax benefit preservation plans). Traditional rights plans are designed to prevent hostile takeovers and have been found to entrench management at the expense of outside shareholders. Tax benefit preservation plans, however, have the potential to benefit shareholders by protecting a potentially valuable corporate asset. We find that entrenchment concerns tend to outweigh the protection of net operating loss carryforwards when firms adopt tax benefit preservation plans. Specifically, we find that abnormal returns are negative at the announcement of a new tax benefit preservation plan. However, the full impact of plan adoption on share prices is not evident until the Delaware Courts validated their use, which also had a negative impact on the firms most likely to consider adopting a plan.
Number of Pages in PDF File: 36
Keywords: Delaware Courts, Net operating losses, Poison pill, Section 382, Shareholder rights plan
JEL Classification: G38, H25, K34
Date posted: May 18, 2014 ; Last revised: April 21, 2015
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