Personal Taxes and Unrelated Mergers and Acquisitions

Abstract

Acquisitions of unrelated firms are often viewed as opportunistic, value-destroying choices by self-interested managers. We posit that unrelated M&A can generate some benefit for shareholders by circumventing high personal income taxes on dividends. We test this mechanism using the 2003 reduction in dividend tax rates (JGTRRA) and a novel relatedness index that augments the conventional horizontal and vertical measures with geographic proximity. Following the tax cut, dividend-paying firms were less likely to do unrelated M&A, in both absolute terms and relative to repurchasers. Accordingly, the post-merger returns to unrelated M&A increased. We observe none of these effects for related acquisitions.

Keywords: Mergers and Acquisitions, Business Taxation, Payout Policy

JEL Classification: G34, H20, H25