M&A and the Tax Benefits of Debt-Financing

50 Pages Posted: 21 Mar 2014

See all articles by Uwe Scheuering

Uwe Scheuering

German Council of Economic Experts

Date Written: March 15, 2014


The deductibility of interest expenses from the corporate tax base creates an incentive for acquiring companies to finance a takeover with debt. In this paper, I investigate the impact of profit taxation on the financing decision in corporate acquisitions for the first time for a sample of different acquirer-countries mainly in Europe. The likelihood to observe a debt-financed acquisition is found to increase in the acquirer's tax rate. In addition, I take into account that the financing decisions of particular acquisitions might not be independent from other investment decisions. Therefore, I analyze the acquirer's capital structure development around the acquisition and find an increase in the statutory tax rate by one %-point to be associated with a stronger increase in the debt ratio by 0.55 %-points during the acquisition period.

Keywords: M&A, Business Taxation, Capital Structure, Empirical Analysis

JEL Classification: G34, H25, H32

Suggested Citation

Scheuering, Uwe, M&A and the Tax Benefits of Debt-Financing (March 15, 2014). ZEW - Centre for European Economic Research Discussion Paper No. 14-019, Available at SSRN: https://ssrn.com/abstract=2411937 or http://dx.doi.org/10.2139/ssrn.2411937

Uwe Scheuering (Contact Author)

German Council of Economic Experts ( email )

Federal Statistical Office
Gustav-Stresemann-Ring 11
Wiesbaden, Hessen 65180

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