Tax Benefits as a Source of Merger Premiums In Acquisitions of Private Corporations

Erickson, Merle; Wang, Shiing‐wu

doi:10.2308/accr.2007.82.2.359

Cited by 57 publications

(31 citation statements)

References 18 publications

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“…Huizinga and Voget (2009) find that when two firms from different countries merge, the new parent's tax home is more likely to be in the country with the lower total tax burden. In addition, Erickson and Wang (2007) predict that organizational form matters and estimate that Scorporation shareholders can sell for higher prices because the sale can be structured to increase future tax deductions for the buyer. 124 Huizinga and Voget (2009) The evidence on shareholder taxation and merger pricing is mixed.…”

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confidence: 99%

A review of tax research

Hanlon¹,

Heitzman²

2010

Journal of Accounting and Economics

2,052

646

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Abstract:In this paper, we present a review of tax research. We survey four main areas of the literature: 1) the informational role of income tax expense reported for financial accounting, 2) corporate tax avoidance, 3) corporate decision-making including investment, capital structure, and organizational form, and 4) taxes and asset pricing. We summarize the research areas and questions examined to date and what we have learned or not learned from the work completed thus far. In addition, we provide our opinion as to the interesting and important issues for future research. ______________________This paper was prepared for the 2009 Journal of Accounting and Economics Conference. We appreciate comments from Scott Dyreng, Mihir Desai (discussant), S.P. Kothari (editor), John Long, Ed Maydew, Lillian Mills, Tom Omer, Sonja Rego, Doug Shackelford, Terry Shevlin, Joel Slemrod, Cliff Smith, David Weber, Ryan Wilson, Jerry Zimmerman, George Zodrow, and conference participants at the JAE Conference as well as at the 2009 University of North Carolina Tax Symposium and the discussant there, Bill Gentry. All errors and omissions are our own. * Corresponding author: 100 Main Street, Cambridge, MA. email: mhanlon@mit.edu. 1 A Review of Tax Research IntroductionIn this paper, we review tax research in accounting as well as tax research in economics and finance to the extent that it is related to or is affected by research in accounting. Shackelford and Shevlin (2001) provide a careful and thorough review of empirical tax research in accounting in the prior Journal of Accounting and Economics review volume. Shackelford and Shevlin limit their review to research published in accounting outlets and describe the development of the relatively young archival, microeconomic-based income tax literature that arose from the Scholes andWolfson framework. In his discussion of the review, Maydew (2001) emphasizes the need for tax researchers in accounting to think more broadly and to incorporate more theory and evidence from economics and finance. We agree. Tax research has a long history in many disciplines; this fact cannot be ignored. Our goal in this paper is to integrate the theoretical and empirical tax research from accounting, economics, and finance, to summarize what is known and unknown, and to offer suggestions for future research.The multidisciplinary nature of tax research is what makes tax research exciting (yes, exciting), yet difficult. Tax research can be difficult not only because one has to follow tax studies in accounting, finance, economics, and law (through academic institutions, governmental agencies, and policy think tanks), but also because different disciplines often use different languages and have different perspectives. 1 For example, economists generally focus on tax compliance, tax incidence (such as who bears the corporate tax), investment and economic growth effects (such as how taxes 1 Slemrod (1992a) characterizes these differences as economists studying what corporations actually do and accountants stud...

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confidence: 99%

A review of tax research

Hanlon¹,

Heitzman²

2010

Journal of Accounting and Economics

2,052

646

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“…This goal is contrary to the widely accepted view that S-corporation status is advantageous to shareholders wishing to sell their business. Erickson and Wang (2007) lay out the theoretical argument and show that, empirically, S corporations across all industries receive higher purchase prices relative to comparable C corporations. Tax and estate planners consistently advise small business owners of C corporations to strongly consider conversion to S status, particularly if they are contemplating selling their business in the future.…”

Section: It Is Not Obviousmentioning

confidence: 95%

“…As Erickson and Wang (2007) document, in comparison with C corporations, S corporations provide tax advantages in a sale. With some simplification, the reason is as follows.…”

Section: It Is Not Obviousmentioning

confidence: 99%

The Impact of Tax Law Changes on Bank Dividend Policy, Sell-Offs, Organizational Form and Industry Structure

Mehran¹,

Suher

2009

SSRN Journal

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“…It is important to note that these studies examine public company acquisitions of public targets. These deals are almost exclusively consummated through stock acquisitions and without an election under §338 to allow a step‐up in tax basis to fair market value (Erickson and Wang ). Therefore, these studies examine settings in which managers can make opportunistic financial reporting decisions without sacrificing tax benefits .…”

Section: Background and Hypothesesmentioning

confidence: 99%

Trade‐offs between Tax and Financial Reporting Benefits: Evidence from Purchase Price Allocations in Taxable Acquisitions

Lynch

Romney

Stomberg

et al. 2019

Contemporary Accting Res

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Under U.S. GAAP, firms recognize assets acquired in business combinations at fair value. Similarly, in taxable asset acquisitions firms adjust the tax basis of assets to fair value. Managers can increase the present value of future tax savings by allocating a greater portion of the purchase price to shorter‐lived assets than to goodwill or indefinite‐lived intangibles. However, this tax planning strategy imposes a financial reporting cost because it reduces book income following the acquisition; all else equal, allocations to shorter‐lived depreciable assets increase book depreciation expense, whereas allocations to goodwill and indefinite‐lived intangibles do not increase book amortization expense. We exploit the features of taxable asset acquisitions to investigate trade‐offs between tax and financial reporting incentives. We predict and find greater allocations to depreciable versus intangible assets when managers have strong tax incentives and weak financial reporting incentives. However, we also find that strong financial reporting incentives moderate the effects of strong tax incentives. These findings contribute new evidence to the literature on the importance of nontax costs in tax planning decisions

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Tax Benefits as a Source of Merger Premiums In Acquisitions of Private Corporations

Cited by 57 publications

References 18 publications

A review of tax research

A review of tax research

The Impact of Tax Law Changes on Bank Dividend Policy, Sell-Offs, Organizational Form and Industry Structure

Trade‐offs between Tax and Financial Reporting Benefits: Evidence from Purchase Price Allocations in Taxable Acquisitions

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