CEO Tax Effects on Acquisition Structure and Value

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...

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Bibliographic Details
Published in:The Accounting review 2021-03, Vol.96 (2), p.333-363
Main Authors: Hanlon, Michelle, Verdi, Rodrigo S., Yost, Benjamin P.
Format: Article
Language:English
Subjects:
Acquisition
Acquisitions & mergers
Capital gains
Chief executive officers
Chief executives
Executives (Business)
Premiums
Stockholders
Tax incentives
Tax legislation
Tax rates
Taxation
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Summary: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. JEL Classifications: G34:, H24; H32: J33; M52.
ISSN:0001-4826
1558-7967
DOI:10.2308/tar-2018-0376