The Effect of Shareholder-Level Capital Gains Taxes on Acquisition Structure

Posted: 2 Jun 2004

See all articles by Benjamin C. Ayers

Benjamin C. Ayers

University of Georgia

Craig E. Lefanowicz

University of Virginia - McIntire School of Commerce

John R. Robinson

Texas A&M University - Department of Accounting

Abstract

This study investigates the effect of shareholder capital gains taxes on the structure of corporate acquisitions. We analyze a sample of large publicly-traded firms acquired in taxable cash-for-stock and tax-free stock-for-stock acquisitions from 1975 to 2000. We model acquisition structure (i.e., taxable cash-for-stock acquisitions versus tax-free stock-for-stock acquisitions) as a function of target shareholder capital gains taxes and other economic factors believed to influence acquisition structure. Consistent with expectations, we find a positive association between the capital gains tax rate for individual investors and the use of tax-free stock-for-stock acquisitions. In addition, we find that the effect of the capital gains tax rate for individuals decreases with target institutional ownership (a proxy that represents the likelihood the price-setting shareholder is not subject to the individual capital gains tax rate). We reconcile our analyses with previous studies and identify a plausible explanation for the lack of results in prior research. In supplemental analysis, we also report evidence that corporations time the completion of taxable acquisitions around major tax rate changes to minimize shareholder capital gains taxes. In sum, results suggest that shareholder-level taxes have a significant effect on the choice of taxable cash-for-stock versus tax-free stock-for-stock acquisitions, and this effect varies with the tax status of target shareholders.

Keywords: Capital gains taxes, mergers and acquisitions, acquisition form

JEL Classification: G34, H25

Suggested Citation

Ayers, Benjamin C. and Lefanowicz, Craig E. and Robinson, John R., The Effect of Shareholder-Level Capital Gains Taxes on Acquisition Structure. Available at SSRN: https://ssrn.com/abstract=552727

Benjamin C. Ayers (Contact Author)

University of Georgia ( email )

706-542-3772 (Phone)
706-542-3630 (Fax)

Craig E. Lefanowicz

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-924-6356 (Phone)

John R. Robinson

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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