Targets' Tax Shelter Participation and Takeover Premiums

64 Pages Posted: 9 Jul 2015

See all articles by Travis Chow

Travis Chow

The University of Hong Kong

Kenneth J. Klassen

University of Waterloo - School of Accounting and Finance

Yanju Liu

Hong Kong Baptist University – Department of Accountancy and Law

Date Written: June 17, 2015

Abstract

This paper examines the effect of targets’ participation in tax shelters on takeover premiums in mergers and acquisitions. Using a novel dataset in which targets disclose that they have not participated in tax shelters, we find that targets that make this statement in their merger filings are associated with 4.6 percent higher takeover premiums, on average. This relation is consistent with acquirers being are concerned about the potential future liabilities when targets have engaged in tax sheltering. Consistent with this interpretation, the positive association between targets’ non sheltering disclosure and acquisition premiums is stronger for less tax aggressive acquirers. This paper demonstrates the importance of targets’ aggressive tax positions in the determination of premiums offered to targets’ shareholders.

Keywords: tax sheltering, tax aggressiveness, takeover premium

JEL Classification: G34, H25, K34

Suggested Citation

Chow, Travis and Klassen, Kenneth and Liu, Yanju, Targets' Tax Shelter Participation and Takeover Premiums (June 17, 2015). Singapore Management University School of Accountancy Research Paper No. 2015-36, Available at SSRN: https://ssrn.com/abstract=2628338 or http://dx.doi.org/10.2139/ssrn.2628338

Travis Chow

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Kenneth Klassen (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x38550 (Phone)
519-888-7562 (Fax)

Yanju Liu

Hong Kong Baptist University – Department of Accountancy and Law ( email )

Hong Kong

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