The Effect of Seller Income Taxes on Acquisition Price: Evidence from Purchases of Taxable and Tax-Exempt Hospitals

Posted: 29 Mar 2004

See all articles by Dan S. Dhaliwal

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Merle Erickson

University of Chicago - Booth School of Business

Shane Heitzman

University of Southern California - Marshall School of Business

Abstract

This paper investigates the impact of the seller's tax liability on the price paid in hospital acquisitions. Lock-in theory predicts that for a given asset, asset holders with larger tax liabilities demand a higher price to compensate for income tax liabilities generated on the sale. We apply this theory to a sample of hospital acquisitions by for-profit firms where the primary difference among target hospitals is the seller's tax status - either taxable or tax-exempt. Consistent with the predicted lock-in effect, the evidence indicates that purchase prices are higher when the seller is taxable than when the seller is tax-exempt. Thus, our findings suggest that seller tax liabilities are positively related to purchase prices.

JEL Classification: H24, H25, G34, G32, M41, L31

Suggested Citation

Dhaliwal, Dan S. and Erickson, Merle and Heitzman, Shane, The Effect of Seller Income Taxes on Acquisition Price: Evidence from Purchases of Taxable and Tax-Exempt Hospitals. Journal of the American Taxation Association (JATA), Vol. 26, No. 2. Available at SSRN: https://ssrn.com/abstract=521522

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Merle Erickson

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-0716 (Phone)
773-702-0458 (Fax)

Shane Heitzman (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

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