Taxes and Merger Activity: Evidence From a Quasi-Natural Experiment

46 Pages Posted: 11 Aug 2020 Last revised: 14 Sep 2020

See all articles by Julian Atanassov

Julian Atanassov

University of Nebraska

Vineet Bhagwat

George Washington University - Department of Finance

Xiaoding Liu

Texas A&M University - Department of Finance

Date Written: July 11, 2020

Abstract

Using staggered changes in state corporate income tax rates, we document that firms are more likely to undertake an acquisition and pay cash for it when taxes increase. The likelihood is greater for financially constrained firms. We find no change in the CAR and takeover premia after tax increases, suggesting that mergers are only used to undo the negative effect of higher taxes on firm value. Finally, we demonstrate that a target is more likely to be acquired if its state corporate income tax rate decreases. The acquisition of targets in lower tax states is followed by a shift in operations by the acquiring firm to the state of the target to reduce its tax burden.

Keywords: Taxes, Corporate Income Tax, Mergers & Acquisitions, Financial Constraints, Takeover Premium, Capital Structure, Debt, Leverage

JEL Classification: G34, H71

Suggested Citation

Atanassov, Julian and Bhagwat, Vineet and Liu, Xiaoding, Taxes and Merger Activity: Evidence From a Quasi-Natural Experiment (July 11, 2020). Available at SSRN: https://ssrn.com/abstract=3649155 or http://dx.doi.org/10.2139/ssrn.3649155

Julian Atanassov (Contact Author)

University of Nebraska ( email )

CBA
University of Nebraska, Lincoln
Lincoln, NE 68588
United States

Vineet Bhagwat

George Washington University - Department of Finance ( email )

2023 G Street
Washington, DC 20052
United States

Xiaoding Liu

Texas A&M University - Department of Finance ( email )

Texas A&M University
College Station, TX 77843
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
54
Abstract Views
358
rank
477,066
PlumX Metrics