CEO Tax Effects on Acquisition Structure and Value
67 Pages Posted: 16 Jul 2018 Last revised: 14 Jun 2019
Date Written: June 12, 2019
We hypothesize that prior evidence of capital gains tax liabilities having an effect on acquisition features is driven by CEOs’ tax liabilities. To test this hypothesis, we estimate CEOs’ tax liabilities for a large sample of acquisitions over the last twenty years and examine the effects of such liabilities on acquisition outcomes. Results indicate that the positive relations between shareholder-level capital gain tax rates and 1) the likelihood of a nontaxable acquisition and 2) acquisition premiums documented in Ayers, Lefanowicz, and Robinson (2004, 2003) are largely driven by CEO tax effects. Furthermore, we find evidence consistent with the CEO’s tax incentives leading to potential agency problems under certain conditions. Finally, we show that whether acquisition structure or premiums are adjusted in response to CEO taxes depends on the alternatives available for the acquirer. Our study contributes to our understanding of what taxes and whose taxes affect acquisition structure and value.
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