Corporate Tax Cuts, Merger Activity, and Shareholder Wealth
71 Pages Posted: 16 Mar 2017 Last revised: 22 May 2018
Date Written: May 17, 2018
We study the impact of the Domestic Production Activities Deduction (DPAD) on mergers and acquisitions. DPAD reduces effective corporate income tax rates for firms based on their income from work or goods made in the US. Results indicate that the quantity and quality of acquisitions by DPAD-advantaged firms conform to the predictions of the neoclassical theory of the firm. Specifically, acquisitions, particularly those cash-financed, increase substantially for firms in industries with large DPAD-related tax cuts. Moreover, DPAD improves acquisition quality for deals in which acquirers and targets are likely to generate incremental DPAD tax benefits through their merger.
Keywords: Corporate Tax Deduction; Acquisitions; Firm Performance; Agency Problems
JEL Classification: G34; H25; M48
Suggested Citation: Suggested Citation