Are Potential Tax Benefits Priced in Mergers and Acquisitions?
46 Pages Posted: 29 Jun 2021
Date Written: August 31, 2018
Prior studies suggest that private firms pay less for acquisitions compared to public firms. In this study, we examine whether there are differences in the tax characteristics of target firms acquired by public and private bidders and whether such differences can explain variations in the premiums they offer. Our results show that relative to private bidders, public bidders acquire firms with tax attributes that can directly reduce cash taxes payable without affecting accounting income. Specifically, targets with foreign income, tax refund account and targets that are tax aggressive have a higher probability of being acquired by public firms, while those with tax credits and deferred tax assets, net operating losses and capital-loss carry-forwards have a lower probability of being acquired by public firms relative to private firms. We also find that some differences exist in the valuation of target firms' tax attributes. Public bidders, in contrast to private bidders, value potential tax benefits from acquiring a target with foreign income and tax refunds. They also value the potential tax benefits from targets that manage earnings. However, the tax aggressiveness of a target influences the acquisition and pricing by both types of bidders. Overall, our results suggest that both public and private firms make acquisitions strategically to reduce overall tax payments. By providing evidence on the role of taxes in M&A transactions, our findings inform policymakers on tax-related motivations of acquisitions by private and public firms.er Abstract
Keywords: Mergers and Acquisitions, Private firms; Public firms; Tax Characteristics; Premium
JEL Classification: G34, H24, H26, M41
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