Tax Avoidance as a Driver of Mergers and Acquisitions

Following a merger or acquisition, a target firm’s effective tax rate decreases on average by 3 percentage points. This decline is as high as 8 percentage points when the acquiring firm is tax aggressive. Further, target firm profitability decreases, particularly in the case of targets having a higher statutory tax rate than the acquirer. These results point to acquiring firms’ ability to more effectively lower target firms’ tax burdens after the deal takes place being a potential driver of the deal. On the contrary we do not find a change in target leverage post deal. The latter finding we attribute to the existence of group taxation regimes in many countries, which makes it more efficient to use a highly levered holding company to acquire the target instead of altering the leverage of the target itself.

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