Does Target Tax Aggressiveness Matter in Corporate Takeovers?

45 Pages Posted: 21 Dec 2012 Last revised: 28 Nov 2017

See all articles by Xiumin Martin

Xiumin Martin

Washington University in Saint Louis - Olin School of Business

Yinuo Tang

The University of Hong Kong

Cong Wang

The Chinese University of Hong Kong, Shenzhen

Hong Zou

The University of Hong Kong - Faculty of Business and Economics

Date Written: November 1, 2017

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

Suggested Citation

Martin, Xiumin and Tang, Yinuo and Wang, Cong and Zou, Hong, Does Target Tax Aggressiveness Matter in Corporate Takeovers? (November 1, 2017). Available at SSRN: https://ssrn.com/abstract=2191544 or http://dx.doi.org/10.2139/ssrn.2191544

Xiumin Martin (Contact Author)

Washington University in Saint Louis - Olin School of Business ( email )

Saint Louis, MO 63130
United States

Yinuo Tang

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Cong Wang

The Chinese University of Hong Kong, Shenzhen ( email )

Hong Zou

The University of Hong Kong - Faculty of Business and Economics ( email )

Hong Kong

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