Shareholder Taxes in Acquisition Premiums: The Effect of Capital Gains Taxation

Benjamin C. Ayers · Craig E. Lefanowicz · John R. C. Robinson

192 citations0/0 files storedThe Journal of Finance

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Corporate Finance and Governance Financial Markets and Investment Strategies Corporate Taxation and Avoidance

Abstract

Abstract We exploit cross‐temporal differences in capital gains tax rates to test whether shareholder‐level capital gains taxes are associated with higher acquisition premiums for taxable acquisitions. We model acquisition premiums as a function of proxies for the capital gains taxes of target shareholders, taxability of the acquisition, and tax status of the price‐setting shareholder as represented by the level of target institutional ownership. Consistent with a lock‐in effect for acquisition premiums, results suggest a unique positive association between shareholder capital gains taxes for individual investors and acquisition premiums for taxable acquisitions, which is mitigated by target institutional ownership.

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2010Relocation of headquarters and international taxation 2005Corporate Tax Avoidance and Firm Value 2008Capital Gains Taxes and Asset Prices: Capitalization or Lock‐in?2012Target Financial Reporting Quality and M&A Deals that Go Bust*2006Capital Gains Tax Overhang and Price Pressure 2017

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