Tax Benefits as a Source of Merger Premiums in Acquisitions of Private Corporations

Posted: 7 May 2007

See all articles by Merle Erickson

Merle Erickson

University of Chicago - Booth School of Business

Shiing-wu Wang

University of Southern California - Leventhal School of Accounting

Abstract

Scholes et al. (2005) predict that S corporations, and other conduit entities, such as partnerships and LLCs, can sell for a tax-driven purchase price premium relative to C corporations. We test this conjecture by comparing purchase price multiples in a sample of taxable stock acquisitions of S corporations to purchase price multiples for a matched set of taxable stock acquisitions of privately held C corporations. Consistent with Scholes et al.'s predictions, we find evidence that the organizational form of the target influences acquisition tax structure and acquisition price. Specifically, the evidence supports the conclusion that conduit entities (S corporations) fetch a tax-based purchase price premium relative to similar C corporations. Furthermore, our estimates indicate that average tax benefits in S corporation acquisitions are equal to approximately 12-17 percent of deal value.

Keywords: Taxes, Tax Benefits, Mergers, Acquisitions

JEL Classification: H25, G34, G24

Suggested Citation

Erickson, Merle and Wang, Shiing-wu, Tax Benefits as a Source of Merger Premiums in Acquisitions of Private Corporations. Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=984459

Merle Erickson (Contact Author)

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)

Shiing-wu Wang

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-5012 (Phone)
213-747-2815 (Fax)

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