How Does Tax Aggressiveness Influence Takeover Activity

Abstract

This paper analyzes the relationship between tax aggressiveness and takeover activity. While prior studies have analyzed the relationship between the level of tax and restructuring, there is little evidence on the indirect effects of corporate tax policy on managerial incentives and investment activities. We test between several indirect effects of tax aggressiveness and find evidence that it creates the appearance of stronger performance to investor, thereby enabling managers to use higher priced stock to engage in takeovers that create less shareholder wealth and demonstrate worse post-takeover operating performance. We find little evidence of an ‘oversight’ effect whereby tax aggressive firms might face greater credit constraints or greater government monitoring.