Taxes and Merger Activity: Evidence From a Quasi-Natural Experiment
46 Pages Posted: 11 Aug 2020 Last revised: 14 Sep 2020
Date Written: July 11, 2020
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: Suggested Citation