The Effects of Taxation on the Merger Decision

46 Pages Posted: 1 Aug 2007 Last revised: 30 Jun 2010

See all articles by Alan J. Auerbach

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

David Reishus

Compass Lexecon - Harvard Square Office

Date Written: March 1987

Abstract

This paper presents estimates of the tax benefits generated by a sample of U.S. mergers and acquisitions involving two public corporations over the period 1968-83 and estimates a "marriage model" based on differences between these mergers and another sample of "pseudomergers" that did not occur to determine the impact of these tax benefits on the probability of two firms combining. Our findings reject the hypothesis that leverage played a large role in fostering these transactions, and that the tax losses and credits of acquired firms likewise exerted no impact on merger activity. Though the use of such benefits by acquiring firms to shield profits of other firms did increase the level of activity, the impact was quite small. On the whole, our results suggest that the changes in tax provisions with respect to mergers introduced by the Tax Reform Act of 1986 will have a small impact on U.S. mergers and acquisitions.

Suggested Citation

Auerbach, Alan Jeffrey and Reishus, David, The Effects of Taxation on the Merger Decision (March 1987). NBER Working Paper No. w2192. Available at SSRN: https://ssrn.com/abstract=346993

Alan Jeffrey Auerbach (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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David Reishus

Compass Lexecon - Harvard Square Office

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Cambridge, MA 02138
United States

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