CEO Tax Effects on Acquisition Structure and Value

Forthcoming in The Accounting Review, March 2021

56 Pages Posted: 16 Jul 2018 Last revised: 8 Mar 2020

See all articles by Michelle Hanlon

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

Benjamin Yost

Boston College - Carroll School of Management

Date Written: February 29, 2020

Abstract

We hypothesize that prior evidence of target shareholder capital gains tax liabilities affecting acquisition features is driven by the tax liabilities of the target firm CEO. To test this, we estimate CEOs’ capital gains tax liabilities for a large sample of acquisitions and examine the effects of such liabilities on acquisition outcomes. Results indicate that the previously documented positive relations between shareholder-level capital gains tax rates and 1) the likelihood of a nontaxable acquisition (Ayers, Lefanowicz, and Robinson 2004) and 2) acquisition premiums (Ayers, Lefanowicz, and Robinson 2003) are largely driven by CEO tax effects. We also find evidence consistent with 1) CEOs’ tax incentives leading to potential agency conflicts under certain conditions and 2) acquisition structure or premium being adjusted in response to CEOs’ taxes depending on the alternatives available to the acquirer. Our study contributes to our understanding of what and whose taxes affect acquisition structure and value.

Suggested Citation

Hanlon, Michelle and Verdi, Rodrigo S. and Yost, Benjamin, CEO Tax Effects on Acquisition Structure and Value (February 29, 2020). Forthcoming in The Accounting Review, March 2021, Available at SSRN: https://ssrn.com/abstract=3208223 or http://dx.doi.org/10.2139/ssrn.3208223

Michelle Hanlon (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-668
Cambridge, MA 02142
United States
617-253-9849 (Phone)

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
100 Main Street E62-666
Cambridge, MA 02142
United States
(617) 253 2956 (Phone)

Benjamin Yost

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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