Tax attributes as determinants of shareholder gains in corporate acquisitions

Abstract

The paper provides evidence that tax attributes of target firms are significant in explaining the abnormal returns to shareholders of both target and acquiring firms following acquisition announcements. The most prominent tax attribute in tax-free acquisitions is the amount of net operating loss carryforwards and tax credits due to expire. The most important tax attribute in taxable acquisitions is the step-up in the acquired assets' basis. The findings also suggest that tax considerations motivate acquisitions. Specifically, obtaining tax-free status for the proposed acquisition increases its likelihood of completion.