Tax Avoidance as a Driver of Mergers and Acquisitions
49 Pages Posted: 26 Dec 2013 Last revised: 3 May 2017
Date Written: December 23, 2013
Following a merger or acquisition, a target firm’s effective tax rate decreases on average by 3 percentage points. This decline is as high as 8 percentage points when the acquiring firm is tax aggressive. Further, target firm profitability decreases, particularly in the case of targets having a higher statutory tax rate than the acquirer. These results point to acquiring firms’ ability to more effectively lower target firms’ tax burdens after the deal takes place being a potential driver of the deal. On the contrary we do not find a change in target leverage post deal. The latter finding we attribute to the existence of group taxation regimes in many countries, which makes it more efficient to use a highly levered holding company to acquire the target instead of altering the leverage of the target itself.
Keywords: Tax accounting, mergers and acquisitions, tax management, propensity score matching
JEL Classification: M41, G34, H25
Suggested Citation: Suggested Citation