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
Date Written: 1992
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: Suggested Citation