Thursday, December 27, 2012
Xiumin Martin (Washington University, Olin School of Business), Cong Wang (Chinese University of Hong Kong, Business School) & Hong Zou (City University of Hong Kong), Does Target Tax Aggressiveness Matter in Corporate Takeovers?:
In this paper we investigate whether tax avoidance has an effect on M&A terms. We find that tax aggressiveness of target firms negatively affects acquisition premiums paid by acquirers. The effect is concentrated in opaque targets or targets that are from less competitive industries, when acquirers hire a top-tier financial advisor, and in the period after the 2003 regulatory changes took effect to curb abusive tax shelters. In addition, target firms with a higher level of tax aggressiveness are more likely to receive a downward adjustment to the initial offer price. Last, we show that public acquirers are more likely to use stock as the currency for acquiring tax aggressive targets. Taken together, our evidence suggests that in the due diligence process acquirers take into account the contingent liability risk arising from target firm tax avoidance and such risk has a measurable impact on acquisition terms.