CEO Tax Effects on Acquisition Structure and Value

67 Pages Posted: 16 Jul 2018 Last revised: 14 Jun 2019

See all articles by Michelle Hanlon

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

Benjamin Yost

Boston College - Carroll School of Management

Date Written: June 12, 2019

Abstract

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.

Suggested Citation

Hanlon, Michelle and Verdi, Rodrigo S. and Yost, Benjamin, CEO Tax Effects on Acquisition Structure and Value (June 12, 2019). Available at SSRN: https://ssrn.com/abstract=3208223 or http://dx.doi.org/10.2139/ssrn.3208223

Michelle Hanlon (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-668
Cambridge, MA 02142
United States
617-253-9849 (Phone)

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
100 Main Street E62-666
Cambridge, MA 02142
United States
(617) 253 2956 (Phone)

Benjamin Yost

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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