Target shareholders' returns: The effect of diversity in accounting standards and tax treatments in cross-border acquisitions

Abstract

Our study examines the relation between offer premiums in cross-border and domestic acquisitions of U.S. target companies and international differences in accounting and tax treatments for goodwill. The impact of the Tax Reform Act of 1986 [U.S. Congress (1986)] and the acquirer's home country tax regime on offer premiums is also included in the analysis. A sample of domestically-acquired and foreign-acquired U.S. target companies from 1982 to 1989 was used in the investigation. The empirical tests indicate offer premiums of domestic acquirers were significantly higher than foreign acquirers both before and after the Tax Reform Act of 1986. There was also a significant increase in the frequency of cross-border acquisitions after 1986 as well as an increase in premiums for both groups. The empirical data does not indicate a relation between offer premiums and goodwill accounting standards or tax treatment. In addition, the tax regime of the acquiring company did not affect offer premiums. However, goodwill accounting standards do appear to have affected firm behavior regarding the choice of target companies. The evidence suggests that companies which use reserve accounting for goodwill are more likely to acquire U.S. target companies with large amounts of goodwill than are companies that must amortize goodwill.