Do Taxes Affect the Use of Debt in Financing Corporate Acquisitions?
42 Pages Posted: 7 Mar 2002
Date Written: February 2002
We examine the influence of taxes on U.S. corporations' methods of financing taxable stock acquisitions during 1987-1997. Our tests provide the first empirical evidence that acquiring-firms' foreign tax credit positions can significantly reduce their propensity to use debt (versus internal funds) to finance acquisitions. This is true even though the acquirers are high-tax rate firms that would ordinarily have tax incentives to use debt. We also find that acquiring firms are significantly less likely to use debt financing when the target firms they acquire have tax-loss carryovers. These results provide new insights regarding how taxes relate to acquisitions financing.
Keywords: Financing choice, Corporate acquisitions, Taxes
JEL Classification: G32, G34, H25
Suggested Citation: Suggested Citation