Corporate Capital Gains Taxation and Acquisition Activity
64 Pages Posted: 9 Apr 2016 Last revised: 11 Apr 2019
Date Written: April 11, 2019
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
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