Corporate Tax Cuts, Merger Activity, and Shareholder Wealth
Forthcoming: Journal of Accounting and Economics
59 Pages Posted: 16 Mar 2017 Last revised: 25 Mar 2020
Date Written: February 25, 2019
We study the impact of the Domestic Production Activities Deduction (DPAD) on mergers and acquisitions. DPAD reduces corporate tax rates on income from work or goods made in the US. Results indicate that the quantity and quality of acquisition bids by DPAD-advantaged firms conform to the predictions of the neoclassical theory of the firm and the theory of financial constraints. Specifically, bids, particularly those cash-financed, increase substantially in industries with large DPAD-related tax cuts and for firms with financial constraints. Moreover, DPAD improves acquisition quality where acquirers and targets are likely to generate incremental DPAD tax benefits through their merger.
Keywords: Corporate Tax Deduction; Acquisitions; Firm Performance; Financial Constraints
JEL Classification: G34; H25; M48
Suggested Citation: Suggested Citation