The Role of Taxes, Financial Reporting, and Other Market Imperfections in Structuring Divisive Reorganizations
Andrew W. Alford
Goldman, Sachs & Co.
Philip G. Berger
University of Chicago - Booth School of Business
We examine the relative importance of taxes and nontax factors in explaining companies' decision to divest using a sale to a third party versus a spinoff to existing shareholders. We find that taxes outweigh financial reporting motives for unaggressive financial reporters, but that the two factors are weighted equally by aggressive reporters. This finding adds to the literature on firms' willingness to forsake tax benefits in order to increase reported income. Additional results indicate that funds constraints, buyer demand for the divested unit, and transaction costs of spinoffs also influence firms' restructuring behavior in ways that impede the use of spinoffs when they would reduce taxes.
JEL Classification: M41, G34, D23, L22
Date posted: June 30, 1998