The Effects of Goodwill Tax Deductions on the Market for Corporate Acquisitions

Abstract

We analyze the effect of the tax deduction for goodwill amortization provided by the Omnibus Budget Reconciliation Act of 1993 (OBRA) on the market for corporate acquisitions. We analyze a sample of taxable corporate acquisitions, including acquisitions of subsidiaries, private firms, and public firms, occurring over the period 1990 through 1996. We assess the impact of the goodwill legislation by (1) quantifying the frequency and size of qualifying acquisitions and comparing these acquisitions with non-qualifying acquisitions pre- and post-OBRA and (2) investigating if and how the goodwill amortization deduction influenced the premium paid for qualifying corporate acquisitions. We estimate a regression of acquisition premiums on target firm characteristics including a proxy for purchased goodwill. We find that acquisitions qualifying for goodwill amortization comprise less than 17% of sample taxable corporate acquisitions before OBRA and this percentage does not increase after the enactment of OBRA. Nonetheless, our regression results indicate that the OBRA goodwill provisions did contribute to a significant increase in acquisition premiums associated with purchased goodwill for qualifying transactions. Thus, rather than operate as a subsidy to acquiring firms, we find that a significant portion of the tax benefits associated with the goodwill amortization deduction accrues to target firm shareholders.

JEL Classification: G34, M41, H25