The Effect of Shareholder-Level Capital Gains Taxes on Acquisition Structure

Abstract

This study investigates the effect of shareholder capital gains taxes on the structure of corporate acquisitions. We analyze a sample of large publicly traded firms acquired in taxable cash-for-stock and tax-free stock-for-stock acquisitions from 1975 to 2000. We model acquisition structure (i.e., taxable cash-for-stock acquisitions versus tax-free stock-for-stock acquisitions) as a function of target shareholder capital gains taxes and other economic factors believed to influence acquisition structure. Consistent with expectations, we find a positive association between the capital gains tax rate for individual investors and the use of tax-free stock-for-stock acquisitions. In addition, we find that the effect of the capital gains tax rate for individuals decreases with target institutional ownership (a proxy that represents the likelihood the price-setting shareholder is not subject to the individual capital gains tax rate). We reconcile our analyses with previous studies and identify a plausible explanation for the lack of results in prior research. In supplemental analysis, we also report evidence that corporations “time” the completion of taxable acquisitions around major tax rate changes to minimize shareholder capital gains taxes. In sum, results suggest that shareholder-level taxes have a significant effect on the choice of taxable cash-for-stock versus tax-free stock-for-stock acquisitions, and this effect varies with the tax status of target shareholders.

Evaluation and Analysis on Tax Synergistic Effects in Merger and Acquisition of Chinese Listed Companies

“…[3] [4] Tax synergistic effect T. Synergistic effect of taxation is enterprises' tax savings realized through mergers and acquisitions. The difference of tax effect before and after the merger is equal to the number.…”

Die steuerliche Berücksichtigung von Refinanzierungsaufwendungen beim internationalen Unternehmenskauf

“…Spengel (2002) untersucht die Unternehmenssteuerreform 2000 unter anderem in Bezug auf diese Frage. Warum und wie Veräußerungsgewinnsteuern allgemein den Unternehmenskauf behindern, zeigen beispielsweise Sahm (2008); Ayers et al (2004); Klein (1999Klein ( , 2001; Stiglitz (1983) und Constantinides (1983. Die Folgen des steuerlichen Abzugs von Refinanzierungsaufwendungen für den internationalen Unternehmenskauf und die in der Folge -gemessen am Nettoprinzip und dem Kriterium der Kapitalimportneutralität -an internationale Steuersysteme zu stellenden Anforderungen untersucht dagegen lediglich Maiterth (2002).…”

Determinants of the medium of payment used to acquire privately-held targets

“…As explained by Ayers et al (2004), the taxability of proceeds is dependent on the medium of payment. Cash payments are subject to a capital gains tax, while stock payments qualify for indefinite deferral.…”

“…Tax can be considered an incremental cost in taxable deals. Ayers et al (2004) determine that the propensity to use stock financing is greater when capital gains taxes are high. However, their study focuses only on public targets, which have a greater proportion of institutional ownership.…”

“…We use the maximum capital gain tax rate in the year (see Ayers et al 2004) of the takeover of concern (MAXTAX), which ranged from 15% to 28% during the sample period. Given that the private targets owners are likely to be categorized in high tax brackets at the time that they are subject to capital gains taxes, we use the maximum capital gains tax as our proxy.…”