Do Firms have Tax-Influenced Capital Structure Targets? Evidence from Taken Over Companies that Became Subsidiaries

46 Pages Posted: 18 Nov 2013

See all articles by Pascal Stock

Pascal Stock

University of Mannheim - Department of Finance and Accounting & Taxation

Date Written: September 26, 2013

Abstract

The study extends the corporate finance and taxation literature by analyzing the existence and convergence towards a regression based target capital structure of newly acquired subsidiaries, private and public ones, in an international context. The pre-merger deviation of the new subsidiary’s debt-to-asset ratio from its target capital structure has a negative influence on the post-merger conversion towards its capital structure target. Taxes positively influence the leverage deviation and convergence for underleveraged new subsidiaries that have spare debt capacity to exploit a comparative tax advantage by carrying more debt. The deviation from the target capital structure is reversed by 26.57% within 3 years after the M&A. Targets taken over by financial acquirers who use holdings revers the 4.52% increase in total leverage occurring during the M&A completion year in the third post-merger year. A part of acquirers’ financial debt used to take over the target is shifted onto the new subsidiary in the form of internal trade credit.

Keywords: Merger & Acquisitions, Target capital structure, Taxes, Speed of adjustment

JEL Classification: G32, G34

Suggested Citation

Stock, Pascal, Do Firms have Tax-Influenced Capital Structure Targets? Evidence from Taken Over Companies that Became Subsidiaries (September 26, 2013). Available at SSRN: https://ssrn.com/abstract=2354455 or http://dx.doi.org/10.2139/ssrn.2354455

Pascal Stock (Contact Author)

University of Mannheim - Department of Finance and Accounting & Taxation ( email )

University of Mannheim
Schloss, SO 205
D-68131 Mannheim
Germany
+49/621/181-3249 (Phone)

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