The Effect of Seller Income Taxes on Acquisition Price: Evidence from Purchases of Taxable and Tax-Exempt Hospitals

This paper investigates the impact of the seller's tax liability on the price paid in hospital acquisitions. Lock‐in theory predicts that for a given asset, asset holders with larger tax liabilities demand a higher price to compensate for income tax liabilities generated on the sale. We apply this theory to a sample of hospital acquisitions by for‐profit firms where the primary difference among target hospitals is the seller's tax status—either taxable or tax‐exempt. Consistent with the predicted lock‐in effect, the evidence indicates that purchase prices are higher when the seller is taxable than when the seller is tax‐exempt. Thus, our findings suggest that seller tax liabilities are positively related to purchase prices.