Anticipated tax planning as a source of merger gains

• Main Authors: CHOW, Travis, KLASSEN, Kenneth, LIU, Yanju
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2014
• Subjects: Tax Aggressiveness; Mergers and Acquisitions; Accounting; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/soa_research/1634
• Institution: Singapore Management University

This paper investigates anticipated tax planning as an underlying source of value creation for acquirers’ shareholders. We hypothesize that merger announcement returns for acquirers reflect their shareholders’ beliefs about the future tax planning performance of the merged firm. Our analyses show that, in acquisitions of more tax aggressive targets by less tax aggressive acquirers, acquirers’ merger announcement abnormal returns decrease as the tax aggressiveness of the acquirer decreases relative to that of the target. For acquisitions of less tax aggressive targets by more tax aggressive acquirers, acquirers’ merger announcement abnormal returns increase as the tax aggressiveness of the acquirer increases relative to that of the target, but is only observable when omitting deals in either extreme decile of the targets’ tax aggressiveness. These findings suggest that the market expects the target to adopt the acquirer’s tax planning rather than benefiting from the more aggressive planning of either party, and that the anticipated tax planning changes are positively associated with acquirer returns. Further, the results suggest that the merged firm’s overall tax planning is easier to reduce than increase through the acquisition.