The Effects of Taxation on Foreign Direct Investment: Evidence from U.S., U.K., and Canadian Acquisitions of U.S. Firms

Posted: 26 Aug 1998

See all articles by Robert Parrino

Robert Parrino

University of Texas at Austin - Department of Finance

Richard B. Boebel

affiliation not provided to SSRN

Robert S. Harris

University of Virginia - Darden School of Business

Abstract

This paper investigates the effects of corporate taxation on foreign direct investment by examining tax differentials between U.S. and foreign buyers of U.S. firms. Unlike prior literature, the paper simultaneously considers tax codes in both the U.S. and foreign countries as well as tax treaties between the countries-all of which affect the taxation of a buyer of a U.S. firm. Focusing on the U.S., Canada, and the U.K., we show that U.K. buyers had a tax advantage over both U.S. and Canadian buyers due to a Dual Resident Corporation feature. In contrast, Canadian buyers faced essentially the same tax burden as U.S. buyers. Studying a sample of 781 acquisitions of U.S. firms, we find tax advantages available to foreign buyers are linked to higher gains to the shareholders of the companies they purchase. The results demonstrate that identification of tax differences between foreign and domestic buyers requires a global tax perspective looking at tax provisions in both countries. Furthermore, the evidence suggests that these tax differences affect pricing of assets in the acquisitions market. This significant role for taxes does not, however, explain nearly all of the differences in target wealth gains between cross-border and domestic takeovers.

JEL Classification: H32

Suggested Citation

Parrino, Robert and Boebel, Richard B. and Harris, Robert S., The Effects of Taxation on Foreign Direct Investment: Evidence from U.S., U.K., and Canadian Acquisitions of U.S. Firms. Available at SSRN: https://ssrn.com/abstract=6486

Robert Parrino

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5788 (Phone)
512-471-5073 (Fax)

Richard B. Boebel

affiliation not provided to SSRN

Robert S. Harris (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4823 (Phone)
434-924-4859 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/harris.htm

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