Do Taxes Affect the Use of Debt in Financing Corporate Acquisitions?

42 Pages Posted: 7 Mar 2002

See all articles by Dan S. Dhaliwal

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Kaye J. Newberry

University of Arizona - Department of Accounting

Connie D. Weaver

Texas A&M University - Department of Accounting

Date Written: February 2002

Abstract

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

Dhaliwal, Dan S. and Newberry, Kaye J. and Weaver, Connie D., Do Taxes Affect the Use of Debt in Financing Corporate Acquisitions? (February 2002). Available at SSRN: https://ssrn.com/abstract=301083 or http://dx.doi.org/10.2139/ssrn.301083

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Kaye J. Newberry (Contact Author)

University of Arizona - Department of Accounting ( email )

Tucson, AZ 85721
United States
520-621-1252 (Phone)
520-621-3742 (Fax)

Connie D. Weaver

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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