How Taxes Transform Corporate Acquisitions into Asset Arbitrage

Research in Finance, v. 10, pp. 173-203,1992, JAI Press Inc., March 1992 (JAI Press Inc., ISBN 1-55938-424-7)

31 Pages Posted: 12 Oct 2013

See all articles by Christopher Coyne

Christopher Coyne

Saint Joseph's University

Frank J. Fabozzi

EDHEC Business School

Uzi Yaari

Rutgers University; School of Business-Camden

Date Written: 1992

Abstract

We argue that under the U.S. tax system, where individual investors are taxed separately from the corporations they own, cash-for-stock acquisition (CSA) is inter alia a profitable arbitrage. This argument is based on the idea that the burden of personal taxation creates a wedge between the price of the target's tangible and intangible net assets (i.e., assets less debt liabilities) in the market for corporate assets, and the lower price of those assets in the stock market. An acquiring corporation performs arbitrage by replicating the target's operating cash flows at a reduced investment cost. Cost reduction is achieved by purchasing the target's assets indirectly through the stock market. The gross arbitrage gain generated equals the target's pre-acquisition personal tax wedge removed by the CSA.

Keywords: Mergers & Acquisitions, Tax Evasion, Monopolization

JEL Classification: G34, H26, L12

Suggested Citation

Coyne, Christopher and Fabozzi, Frank J. and Yaari, Uzi, How Taxes Transform Corporate Acquisitions into Asset Arbitrage (1992). Research in Finance, v. 10, pp. 173-203,1992, JAI Press Inc., March 1992 (JAI Press Inc., ISBN 1-55938-424-7), Available at SSRN: https://ssrn.com/abstract=2337783

Christopher Coyne

Saint Joseph's University ( email )

5600 City Avenue,
Philadelphia, PA 19131
United States

Frank J. Fabozzi

EDHEC Business School ( email )

France
215 598-8924 (Phone)

Uzi Yaari (Contact Author)

Rutgers University ( email )

School of Business
Camden, NJ 08102
United States
610-664-2086 (Phone)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

School of Business-Camden ( email )

Rutgers University
227 Penn Street
Camden, NJ 08102
United States
610-664-2086 (Phone)
610-664-2198 (Fax)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

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