Corporate Tax Cuts, Merger Activity, and Shareholder Wealth
59 Pages Posted: 16 Mar 2017
Date Written: March 14, 2017
We evaluate 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. We find that acquisition spending increases substantially for firms in industries with large DPAD-related corporate income tax cuts. Other results indicate that the quality of acquisitions by DPAD-advantaged firms varies as predicted by existing theories of the firm. Specifically, DPAD improves acquisition quality for bidders with financial constraints or for those that depend on major business counterparties, but not for bidders in non-competitive industries.
Keywords: Corporate Tax Deduction; Acquisitions; Firm Performance; Agency Problems
JEL Classification: G34; H25; M48
Suggested Citation: Suggested Citation