Abstract
This paper examines the relationship between tax avoidance and M&A efficiency in the sample of 243 completed M&As in Korea. I find a negative relationship between tax avoidance and M&A returns. This result suggests that tax avoidance increases information asymmetry between shareholders and managers because it increases corporate opacity. It makes shareholders unable to monitor and control even if managers make opportunistic M&A decisions.
Highlights
A company’s appropriate investment is a prerequisite to maintaining sustained growth
This paper examines the relationship between tax avoidance and Mergers and Acquisitions (M&A) efficiency in the sample of 243 completed M&As in Korea
Operating Cash Flow (OCF): operating cash flow, operating cash flow from cash flow statement scaled by the total book value of assets
Summary
A company’s appropriate investment is a prerequisite to maintaining sustained growth. From the perspective of agency theory, tax avoidance complicates the transaction structure of the company, increasing the opacity of the company and information asymmetry between managers and shareholders, and making it difficult to prevent managers from making inefficient investments. They find that firms with higher-quality accounting make more profitable M&As, suggesting that firms with higher-quality accounting are less likely to make opportunistic M&A investment decisions because financial accounting reporting quality acts as an effective monitoring mechanism to control managers’ behavior These prior studies show that managers have an incentive to decide on mergers and acquisitions to maximize their profits due to agency problem. Tax avoidance complicates a company’s transaction structure, making it difficult to prevent managers from making inefficient investments by increasing the company’s opacity and information asymmetry between managers and shareholders. It shows a general increase in the number of M&As until 2008, sharp decreases in 2009, and increases again after 2010
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