The Effects of Changes in Tax Laws on Corporate Reorganization Activity

37 Pages Posted: 14 Apr 2007 Last revised: 18 Dec 2022

See all articles by Myron S. Scholes

Myron S. Scholes

Stanford Graduate School of Business; Platinum Grove Asset Management L.P.; Oak Hill Platinum Partners, LLC

Mark A. Wolfson

Stanford Graduate School of Business

Date Written: September 1989

Abstract

We present evidence that changes in tax laws passed in the 1980s, culminating with the Tax Reform Act of 1986, had a first order effect on observed merger and acquisition activity in the US. We also present evidence of increased reliance on certain institutional arrangements (unit management buyouts and going-private transactions) used to effect mergers and acquisitions that were designed to reduce the nontax costs of transacting, thereby enabling tax benefits to be realized in a larger number of mergers and acquisitions than might otherwise have occurred. We begin with a "closed-economy" perspective, focusing on the effects of changes in tax laws on the demand for mergers and acquisitions of us corporations by US corporations. We then broaden the scope of inquiry by modeling and testing the effects of changes in tax laws on the demand for mergers and acquisitions of US corporations by foreign multinationals. Here we predict and present confirmatory evidence that while the 1986 Tax Act discouraged transactions among US corporations, it increased the demand for merger and acquisition transactions between US sellers and foreign buyers.

Suggested Citation

Scholes, Myron S. and Scholes, Myron S. and Wolfson, Mark A., The Effects of Changes in Tax Laws on Corporate Reorganization Activity (September 1989). NBER Working Paper No. w3095, Available at SSRN: https://ssrn.com/abstract=980222

Myron S. Scholes (Contact Author)

Stanford Graduate School of Business ( email )

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Platinum Grove Asset Management L.P. ( email )

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Oak Hill Platinum Partners, LLC ( email )

1100 King Street, Building 4
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Mark A. Wolfson

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
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(650) 723-4010 (Fax)

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