Corporate Tax Cuts, Merger Activity, and Shareholder Wealth

71 Pages Posted: 16 Mar 2017 Last revised: 22 May 2018

Jennifer Blouin

University of Pennsylvania - Accounting Department

Eliezer M. Fich

Drexel University - Department of Finance

Edward M. Rice

University of Washington - Michael G. Foster School of Business

Anh L. Tran

Cass Business School, City University London

Date Written: May 17, 2018

Abstract

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

Blouin, Jennifer and Fich, Eliezer M. and Rice, Edward M. and Tran, Anh L., Corporate Tax Cuts, Merger Activity, and Shareholder Wealth (May 17, 2018). Available at SSRN: https://ssrn.com/abstract=2933136 or http://dx.doi.org/10.2139/ssrn.2933136

Jennifer Blouin

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-1266 (Phone)

Eliezer M. Fich

Drexel University - Department of Finance ( email )

LeBow College of Business
3220 Market Street – 11th Floor
Philadelphia, PA 19104
(215) 895-2304 (Phone)

Edward M. Rice (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Anh L. Tran

Cass Business School, City University London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44-207-040-5109 (Phone)
+44-207-040-8881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/experts/A.Tran

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