Working Paper: NBER ID: w1855
Authors: Alan J. Auerbach; David Reishus
Abstract: One motive that is often cited for merger activity is the avoidance of federal income taxes by corporations and their shareholders. Yet there is little empirical evidence on the tax consequences of merger activity, or on the postmerger effects on firm policies of tax motivated mergers. In this paper, we present some initial results based on a large sample of mergers and acquisitions that occurred over the period 1968-83. We find that, in about one fifth of all mergers, there was a potential gain from the transfer of unused tax losses and credits, with an average value of approximately ten percent of the acquired company's market value. Other tax incentives to merge are also measured, but found to be less important quantitatively.
Keywords: mergers; tax incentives; corporate finance; tax policy
JEL Codes: H25; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax incentives (H20) | merger activity (G34) |
| merger of firm with positive federal taxes and firm with tax losses (H32) | reduction in combined federal taxes (H29) |
| transfer of unused tax losses and credits (H24) | tax benefits from mergers (H20) |
| tax benefits present (H20) | exceed ten percent of acquired company's market value (G34) |
| mergers (G34) | increased leverage (G32) |