Download this Paper Open PDF in Browser

Does U.S. Foreign Earnings Lockout Advantage Foreign Acquirers?

48 Pages Posted: 18 Jan 2015 Last revised: 17 Jun 2017

Andrew Bird

Carnegie Mellon University

Alexander Edwards

University of Toronto - Rotman School of Management

Terry J. Shevlin

University of California-Irvine

Date Written: May 5, 2017

Abstract

Prior research has documented a substantial “lockout” effect resulting from the current U.S. worldwide tax and financial reporting systems. We hypothesize that foreign firms are tax- favored acquirers because they can avoid the U.S. tax on repatriations. Consistent with this tax advantage, we find that U.S. domiciled M&A target firms with greater locked-out earnings are more likely to be acquired by foreign than domestic acquirers. This effect is economically significant; a standard deviation increase in our proxy for locked-out earnings is associated with a 12% relative increase in the likelihood that an acquirer is foreign. As the tax advantages for a foreign firm acquiring a U.S. target with locked-out earnings are even greater when the foreign firm operates under a territorial tax system, we also compare their home country tax system. We find that foreign acquirers of U.S. target firms with locked-out earnings are indeed more likely to be residents of countries that use territorial tax systems.

Keywords: Taxes, International, Acquisitions

JEL Classification: F23, G34, H25

Suggested Citation

Bird, Andrew and Edwards, Alexander and Shevlin, Terry J., Does U.S. Foreign Earnings Lockout Advantage Foreign Acquirers? (May 5, 2017). Rotman School of Management Working Paper No. 2550819. Available at SSRN: https://ssrn.com/abstract=2550819 or http://dx.doi.org/10.2139/ssrn.2550819

Andrew Bird

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

Alexander Edwards (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Terry Shevlin

University of California-Irvine ( email )

Irvine, CA California 92697-3125
United States
2065509891 (Phone)

Paper statistics

Downloads
377
Rank
66,096
Abstract Views
2,113