CEO Tax Effects on Acquisition Structure and Value

Abstract

We hypothesize that prior evidence of target shareholder capital gains tax liabilities affecting acquisition features is driven by the tax liabilities of the target firm CEO. To test this, we estimate CEOs’ capital gains tax liabilities for a large sample of acquisitions and examine the effects of such liabilities on acquisition outcomes. Results indicate that the previously documented positive relations between shareholder-level capital gains tax rates and 1) the likelihood of a nontaxable acquisition (Ayers, Lefanowicz, and Robinson 2004) and 2) acquisition premiums (Ayers, Lefanowicz, and Robinson 2003) are largely driven by CEO tax effects. We also find evidence consistent with 1) CEOs’ tax incentives leading to potential agency conflicts under certain conditions and 2) acquisition structure or premium being adjusted in response to CEOs’ taxes depending on the alternatives available to the acquirer. Our study contributes to our understanding of what and whose taxes affect acquisition structure and value.