Does U.S. Foreign Earnings Lockout Advantage Foreign Acquirers?
48 Pages Posted: 18 Jan 2015 Last revised: 17 Jun 2017
Date Written: May 5, 2017
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: Suggested Citation