Corporate Capital Gains Taxation and Acquisition Activity

Abstract

Using a comprehensive sample of M&A deals around the world, we analyze the effect of corporate capital gains taxation on M&As involving corporate sellers (e.g. subsidiary sales). Capital gains taxation distorts the market for corporate control by imposing a cost on corporate sellers which leads to a lock-in effect that inhibits the completion of deals. We find that an increase in the corporate capital gains tax rate affects the location choice and reduces acquisition activity significantly. For the United States, this implies forgone acquisitions from corporate sellers at a volume of around $34.4 billion annually due to capital gains taxes.

Keywords: Corporate taxation, M&A, capital gains tax, lock-in effect

JEL Classification: H25, G34