Insider Tax Effects on Acquisition Structure and Value

Michelle Hanlon* MIT

Rodrigo S. Verdi

MIT

Benjamin P. Yost Boston College

Draft: April 9, 2018

PRELIMINARY AND INCOMPLETE DO NOT QUOTE WITHOUT PERMISSION

Abstract: This study investigates the effect of target firm insiders’ capital gain tax liabilities on acquisition structure and value. We construct insider holdings using data from the Thomson Financial Insiders Data Feed for a large sample of acquisitions over the last twenty years. Results indicate that the positive relations between shareholder-level capital gain tax rates and 1) the likelihood of a nontaxable acquisition and 2) acquisition premiums documented in Ayers, Lefanowicz, and Robinson (2004, 2003) are largely driven by insider tax effects. We also show that whether acquisition structure or premium is adjusted in response to insider taxes depends on the alternatives available for the acquirer. Our study contributes to our understanding of what taxes and whose taxes affect acquisition structure and value. An overriding question in the literature is whether firm management considers shareholder-level taxes in decision-making. We confirm that shareholder-level taxes matter in acquisitions but find that the effects are concentrated in firms where insiders own relatively more of the firm. _______________ *Corresponding author contact information: 100 Main street, Cambridge, MA 02142; Phone: (617) 253-9849; email: mhanlon@mit.edu. We appreciate helpful comments from workshop participants at the University of Oregon. We also thank Alexander Ljungqvist for sharing his firm headquarters location data. The authors gratefully acknowledge financial support from Boston College and the MIT Sloan School of Management.

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Insider Tax Effects on Acquisition Structure and Value

I. INTRODUCTION This study investigates the effect of target firm insiders’ capital gain tax liabilities on

acquisition structure and value. Our motivation is from two separate streams of literature. First,

whether target-shareholder level taxes affect acquisition structure and premiums is a long-standing

question in the literature. While prior literature predicted target-shareholder tax effects (e.g.,

Mandelker 1974; Huang and Walkling 1987; Brown and Ryngaert 1991; Bradley, Desai, and Kim

1988), it was not until more recent studies that the effect of shareholder-level taxes in acquisitions

was supported with empirical data. Specifically, Ayers, Lefanowicz, and Robinson (2003) show

that individual capital gains tax rates are positively associated with acquisition premiums in taxable

takeovers. Ayers, Lefanowicz, and Robinson (2004) extend the investigation and provide evidence

that acquisition structure is more likely to be tax-free when individual capital gains tax rates are

high.1 Together, these studies document the importance of shareholder-level capital gains tax rates

on acquisition structure and premiums.2

Second, recent literature has attempted to open the “black box” of the firm and examine

the effects of characteristics of the executives themselves on firm performance and activity. The

pioneers of this strand of literature, Bertrand and Schoar (2003) examine whether some executives

have differential effects on corporate finance decisions (e.g., investment, leverage). Dyreng,

Hanlon, and Maydew (2010) apply the Bertrand and Schoar (2003) methodology to examine

                                                            1 In addition, Ayers et al. (2007) investigate the lock-in effect of capital gains on aggregate corporate acquisition activity and find that the percentage of firms acquired in a calendar quarter is negatively associated with the capital gains tax rate applicable in that quarter. 2 See Shackelford and Shevlin (2001) and Hanlon and Heitzman (2010) for reviews of the literature.

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whether certain corporate executives are able to reduce corporate tax burdens more than other

executives, and find evidence in the affirmative.

Digging deeper into the black box, insider characteristics have been examined with respect

to merger and acquisition decisions. For example, Jenter and Lewellen (2015) argue that CEOs are

arguably among the most important actors in the takeover market and provide evidence that the

likelihood of a successful takeover bid is much higher when the target CEO is nearing retirement

age. Other studies examining CEO effects on transaction frequency and structure, include those

that investigate whether the private benefits of the CEO (option grants, accelerated vesting, side

payments, job retention, etc.) affect the premium on the deal. In recent work on CEO’s tax burdens

in particular, Yost (2017) finds evidence consistent with higher CEO tax burdens locking-in CEO

shareholdings, leading the CEO to taking less corporate-level risk. Furthermore, Hanlon and

Hoopes (2016) provide evidence that corporate payout policy around tax rate changes is affected

by shareholder-level taxes and the effect is highly concentrated in firms with relatively high insider

ownership. Thus, insider characteristics, including tax preferences, affect corporate decisions.

Taking these two streams of literature together, we hypothesize that effects documented in

Ayers et al. (2003 and 2004) are primarily driven by the tax effects of insiders.3 Our first hypothesis

focuses on the effect of insider tax liabilities on acquisition structure. Ayers et al. (2004) show that

the acquisition is more likely to be structured as a nontaxable deal when shareholder-level capital

gains tax rates are high. If a transaction is structured as a cash-for-stock transaction, then the

acquisition will be taxable to the selling (target) shareholders. In contrast, in general, if the

transaction is structured as a stock-for-stock transaction, the acquisition will be tax-free (really

                                                            3 The Ayers et al. studies do not examine the effect of the tax position of the insiders in the firm but rather attribute the shareholder tax effect to the taxable shareholder group as a whole. How executive-level taxes affect acquisition structure and transacted values is the focus of our study. We can replicate the Ayers et al. results and do not dispute them.

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tax-deferred) to the selling shareholders. The key innovation in our paper is that we predict the

effect of shareholder taxes on acquisition structure to increase in insider ownership. This is

because insiders are in a better position to take shareholder tax liabilities into account when

negotiating a deal and we expect insiders to care about shareholder-level taxes when they bear

those taxes themselves.

Our second hypothesis focuses on acquisition premiums. The hypothesis tested in Ayers et

al. (2003) is that higher target shareholder-level taxes need to be compensated in a taxable

acquisition, and this compensation is reflected in acquisition premiums. Ayers et al. (2003) find

evidence consistent with their hypothesis – capital gains rates are positively related to acquisition

premiums and the effect is mitigated when institutional ownership is high (because they are not

subject to taxation). In our study, we investigate whether the additional premium (i.e., the

compensation for additional taxes on a taxable deal) is increasing in insider holdings. We note,

however, that whether insiders’ taxes will be associated with acquisition premiums in taxable deals

is not obvious. It is possible that managers are compensated for at least some of their taxes by the

firm (via a cash side payment or additional or accelerated amount of equity-based compensation).

If this is the case, there may not be an association between insider owner taxes and acquisition

premiums.

To examine our first hypothesis, we use a sample of acquisitions in the period 1996 – 2016.

We first replicate the Ayers et al. (2004) results on our more recent sample. Consistent with their

results, we find that individual capital gains rates are positively associated with the likelihood of a

nontaxable deal and that this relation is mitigated when tax-exempt institutions hold a large

fraction of the firm. We then test whether insider ownership makes the relation between

shareholder-level taxes and acquisition structure stronger: we find that it does. In fact, we find that

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acquisition structure is not affected by target shareholder-level taxes when insiders own little of

the firm’s shares. This evidence suggests that the structure of corporate acquisitions is affected by

the personal tax incentives of the target company’s insiders, and that the effect of target

shareholders only exist when insiders own a relatively large proportion of the shares.

We test our second hypothesis using a sample of taxable acquisitions from 1996 – 2016

and find evidence consistent with the association between the capital gains rate and acquisition

premiums, consistent with Ayers et al. (2003). We then add a measure of insider ownership

interacted with shareholder-level capital gains rates and find that shareholder-level taxes are

increasingly related to acquisition premiums as insider ownership rises. Indeed, similar to our

results on acquisition structure, we find that the results are almost entirely concentrated in firms

where insider owndership is relatively high.

We then perform some additional tests to assess the robustness of our findings. First, we

examine data surrounding tax rate changes and show that the likelihood of a nontaxable acquisition

is 1) relatively higher after capital gains tax rates increase and 2) relatively lower after capital gains

tax rates decrease, and that these relations are increasing in insider ownership.

Second, we examine changes in state tax rates for insiders. Employing state tax rates

(instead of federal rates) allows for better identification because we take advantage of the staggered

nature of state-level tax rate changes for separate states. In this analysis, we assume the location

of the corporate headquarters is the state of residence of the insiders and note that it is unlikely the

state of residence for outside shareholders. The results suggest that state-level tax rates are

associated with acquisition structure and premiums as insider ownership increases.

Finally, we partition our sample into public and private acquirers and conduct our tests

separately for these two groups. Public acquirers can adjust the acquisition structure (cash versus

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stock deals) as well as the acquisition premium to accommodate the tax liabilities of the target

insiders. In contrast, private acquirers rarely engage in stock deals, meaning that they can only

accommodate tax liabilities via acquisition premium. Interestingly, our results suggest that public

acquirers adjust the acquisition structure (by delaying the taxes to be paid by the insider via a non-

taxable deal), but not the premium as a function of insiders’ tax liabilities. In contrast, private

acquirers do the reverse – they do not adjust acquisition structure (presumably because this is not

an option) but instead compensate insiders for their tax liabilities by increasing the acquisition

premium.

We contribute to the literature by examining whether the tax consequences to target

insiders affect the structure and valuation of acquisitions. An overriding question in the literature

is whether firm management considers shareholder-level taxes in decision-making. Ayers et al.

(2003 and 2004) document that shareholder-level capital gains taxes matter for acquisition

structure and value. 4 We examine this question again taking into account the recent literature on

insiders and employing recent data on insiders. Our evidence suggests that the shareholder-level

tax effects in acquisitions primarily exist when insiders own a relatively large fraction of the firm.

Thus, are managers responding the taxes of their shareholders or to their own tax incentives? We

interpret the evidence as being consistent with Hanlon and Hoopes (2016) — the evidence in both

settings suggests that shareholder-level tax matter when insiders are relatively large shareholders

– when their incentives are aligned with shareholders. Looking inside the black box of the firm to

                                                            4 Earlier studies conjectured shareholder tax effects but did not empirically document an effect (e.g., Mandelker 1974; Huang and Walkling 1987; Brown and Ryngaert 1991; Bradley, Desai, and Kim 1988). Landsman and Shackelford (1995) examined proprietary data for one company, RJR Nabisco, in a novel study and found that shareholders with a lower stock basis in their shares tendered later and for a higher price, suggestive of a lock-in tax effect. However, some debate over identification in their study exists because it is hard to distinguish the tax explanation from one of the differences in risk aversion or propensity to rebalance (Ayers et al. 2003). In addition to these studies on shareholder level taxes, corporate level tax effects have also been examined. For example, Erickson (1998) examined acquirer tax rate effects and Hanlon, Lester, Verdi (2016) examine the effect of the U.S. repatriation tax on locked-out foreign earnings on location of an acquisition transaction.

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investigate the importance of executive-level capital gains taxes is important in the study of

acquisitions as it contributes to our understanding of what taxes and whose taxes affect acquisition

structure and value.

The paper proceeds as follows. Section II discusses prior research and develops our

hypotheses. Section III describes our research design and variable measurement. In Section IV we

discuss our main results and in Section V we present additional tests. Section VI concludes.

II. HYPOTHESES DEVELOPMENT

Ayers et al. (2004) test and find that higher shareholder-level capital gains rates are

positively associated with the likelihood of a non-taxable acquisition structure. We examine this

result more closely by parsing out the effect of insider taxes based on more recent research that

suggests that insider tax characteristics are often important in corporate decisions. For example,

Yost (2017) finds evidence consistent with higher CEO tax burdens locking-in CEO shareholdings,

and leading to the CEO to taking less corporate-level risk. In addition, Hanlon and Hoopes (2016)

investigate whether shareholder-level taxes are important in payout policy decisions. The authors

find evidence that firms paid more dividends prior to a shareholder-level dividend tax increases

and that firms accelerated dividends into a time period when shareholder-level taxes were lower.

However, they also find that the result is largely concentrated in firms where insiders own a

relatively large fraction of the company. Based on these studies and other studies discussed above

that examine manager effects, we predict that the relation between shareholder-level taxes and

acquisition structure is increasing in insider ownership. Our first hypothesis is as follows:

H1: In a sample of completed acquisitions, the relation between shareholder-level capital gains tax rates and the probability of the transaction being nontaxable (i.e., stock-for-stock) is increasing in insider ownership.

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Our second hypothesis concerns the valuation of the transaction. Ayers et al. (2003) test

and find that shareholder-level capital gains tax rates are positively associated with acquisition

premiums. The hypothesis is that shareholders demand a higher selling price when they face higher

taxes upon the sale of the company. Ayers et al. (2003) find evidence consistent with their

hypothesis. We predict that this effect is increasing in insider holdings – that shareholder taxes

have the greatest effect when insiders hold relatively more of the shares.

However, the prediction in our setting is not clear ex-ante. Ayers et al. (2003) find a

significantly positive association with capital gains tax rates (and proxies for price appreciation)

with acquisition premiums, consistent with higher premiums being demanded when shareholder

taxes are higher. Ayers et al. (2003) provide evidence that this relation is stronger for taxable deals,

but also find a significant relation for tax-free deals. The authors note this unexpected result and

provide several plausible explanations including 1) shareholders possibly do not take advantage of

the tax deferral in tax-free deals and sell the acquired stock after the transaction leading them to

demand a price concession in the transaction for the taxes due and/or 2) that there are unobservable

factors correlated with the capital gains proxies that affect premiums in all deals. A prediction is

even less clear in our setting because in addition to the issues in Ayers et al. (2003) we are

examining the effect of insider taxes on acquisition premiums. At first blush, it may seem that

there should obviously be a positive relation between insider taxes and acquisition premiums

because if any party is in a position to have their taxes compensated for via acquisition price, it

should be the insiders. However, the insiders also have other potential avenues available to be

made whole. For example, the insiders may receive additional stock options, may receive the right

to accelerate option vesting, or receive other types of “side payments” as compensation to engage

in the transaction. If this is the case, we might not observe a relation with insider taxes and

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acquisition premiums. If we do not observe such premiums, it is possible that insiders negotiate

higher compensation for themselves, but leave the shareholders’ tax costs uncompensated. We

state our second hypothesis in alternative form:

H2: In a sample of completed taxable acquisitions, the relation between shareholder-level capital gains tax rates and acquisition premiums is increasing in insider ownership.

III. SAMPLE SELECTION, RESEARCH DESIGN, AND VARIABLE MEASUREMENT

Sample Selection

We create the sample of acquisitions by obtaining data from SDC Platinum on all U.S.

deals with completion dates from January 1, 1996 through December 31, 2016. We use 1996 as

our starting year because we construct proxies for insider holdings using data from Thomson

Financial Insiders Data Feed, which shows improved coverage and accuracy beginning in 1996.

Because we require target ownership data, we restrict our sample to deals in which the target is a

publicly traded firm. We are interested only in deals in which the target firm’s stock is acquired,

so we exclude deals listed as acquisitions of assets.5 To ensure there was a change in ownership,

we limit the sample to deals in which the bidder acquires more than 50 percent of the target shares

in the transaction, and owns 100 percent of the target shares following the transaction. Further, we

exclude acquisitions with deal values below $10 million in order to exclude very small

transactions. Finally, we classify acquisitions as taxable cash-for-stock deals if more than 50

percent of the consideration paid was cash, as nontaxable stock-for-stock deals if more than 50

percent of the consideration was stock, and we exclude the deal from the sample if neither criteria

                                                            5 This assures there is the potential for taxation at the shareholder level. An asset sale is taxable at the corporate level on the sale of assets, and only if it liquidates will there be potential tax at the shareholder level.

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is met. After these restrictions, the final sample consists of 1,463 taxable deals and 564 nontaxable

deals, for a total of 2,027 deals.

Table 1 Panels A and B provide the distribution of deals by year and industry, respectively.

Further, Panel A provides the yearly distribution separately for acquisitions made by public and

private acquirers (total acquisitions of 1,121 and 906, respectively). The panel reveals that public

bidders are almost equally likely to pursue a nontaxable deal as a taxable deal (629 cash deals

versus 492 stock deals, or 56% versus 44%). However, private bidders rarely pursue nontaxable

deals (834 cash deals versus 72 stock deals, or 92% versus 8%). It stands to reason that private

bidders are unlikely to offer their own stock in a nontaxable bid due to the lack of a public share

price and incentives to retain control. For this reason, in our tests investigating acquisition structure

we restrict the sample to the 1,121 deals in which the bidder is publicly traded.

Unlike with acquisition structure, both public and private bidders can freely adjust

acquisition premiums in response to tax incentives. Thus in our analysis of acquisition premiums,

we include deals in which the bidders are either publicly traded or privately held. In this analysis

of premiums, however, we do not include nontaxable (tax-deferred) deals because we primarily

expect acquisition premiums to respond to shareholder-level tax incentives in taxable deals. In

other words, the sellers demand a higher premium to compensate for additional tax on the taxable

transaction. As a result, in our main tests regarding acquisition premiums, we restrict the sample

to the 1,463 taxable deals. We then examine separately 564 nontaxable deals to conduct a

falsification test.

Research Design – Acquisition Structure Analysis (Hypothesis 1)

We use a series of tests to examine H1 regarding acquisition structure. We begin by

replicating, as closely as possible, the primary results in Ayers et al. (2004) over the more recent

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sample period of 1996 through 2016. Using our sample of acquisitions made by public firms, we

estimate the following regression:6

(1)

Nontaxable Deal is an indicator variable equal to one if the deal is a stock-for-stock, tax-free

transaction, and equal to zero otherwise. We classify deals as nontaxable (tax-deferred) if more

than 50 percent of the purchase price is paid using the acquirer’s stock. Similarly, we classify deals

as taxable if more than 50 percent of the purchase price is paid using cash.

We measure the tax rate in our main tests as the maximum federal long-term capital gains

rate, Fed CG Rate, on the date the acquisition is completed. There were four different federal tax

regimes during our sample period, representing three major tax rate changes. In the Taxpayer

Relief Act of 1997, the top capital gains tax rate was reduced from 28 percent to 20 percent,

effective May 7, 1997. In the Jobs and Growth Tax Relief and Reconciliation Act of 2003, the top

rate was further reduced from 20 percent to 15 percent, effective January 1, 2003. And on January

1, 2013, the top rate increased to 23.8 percent as a result of the American Taxpayer Relief Act of

2012 (raising it to 20%) as well as the introduction of the Net Investment Income Tax as part of

the Affordable Care Act.7 To ease interpretation of our variables interacted with Fed CG Rate (e.g.,

TI Inst Own n Eq. 1), we shift Fed CG Rate to center around zero by reducing the statutory tax rate

                                                            6 We opt to use a linear probability model (LPM) as opposed to a non-linear limited dependent variable (LDV) model (Angrist and Pischke, 2009) for our acquisition structure tests. We opt for the LPM to allow for easy interpretation of the coefficients, especially with regards to the interacted coefficients (i.e., Ai and Norton, 2003), as well as the use of fixed effects in our model. The use of LPM does not impose potential bias or inconsistency on the coefficients and standard errors (Greene, 2004). The use of a LPM in a LDV situation is supported by Angrist and Pischke (2009). We use heteroskedasticity robust standard errors in our estimation of the LPM to adjust for the well-known problem of heteroskedasticity when using an LPM with a LDV. We have estimated our tests using LDV and the results are qualitatively unchanged.  7 The net investment tax in the ACA imposes a 3.8 percent surtax on income from investments. It applies to investment income of married couples with more than $250,000 of adjusted gross income, and single filers with more than $200,000 of adjusted gross income.

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by 20 percentage points, such that rather than ranging from 15 percent to 28 percent, Fed CG Rate

ranges from -5 percent to 8 percent.8

TI Inst Own is the percentage of the firm owned by tax-insensitive institutional owners.

We construct this variable using the classifications described in Blouin, Bushee, and Sikes (2017)

and provided in the data available on Brian Bushee’s website. TI Inst Own is set equal to the

percentage of the firm held by tax-insensitive institutional investors.

We follow Ayers et al. (2004) and control for several target firm characteristics, including

the target firm’s five-year return prior to the acquisition announcement date, book-to-market value

of equity, and ROA. We add target firm size as an additional control variable to the set used in

Ayers et al. (2004). Next we control for whether the bid was hostile in nature, whether there were

multiple bidders, as well as the change in the S&P 500 index for the twelve months preceding the

acquisition. We also include controls for a number of bidder firm characteristics, including the

book-to-market value of equity, the size of the bidder’s net operating losses, bidder institutional

ownership, bidder abnormal returns in the 12 months preceding the acquisition announcement, the

value of cash holdings, and the trichotomous tax rate variable from Graham (1996). Finally, in the

tests examining acquisition structure we also control for the relative size of the target and bidder

firms. Details on variable construction are contained in Appendix A. We also include fixed effects

for time and industry; represents indicator variables for five-year intervals starting in 1996,

and represents SIC 1-digit fixed effects.

Following Ayers et al. (2004), we predict that the coefficient on Fed CG Rate, , is

positive. This result is consistent with the hypothesis that shareholder-level taxes matter to

acquisition structure — when capital gains tax rates are higher, target firm shareholders prefer to

                                                            8 Note that our inferences are unaffected if we use the unadjusted maximum statutory tax rates for Fed CG Rate.

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be acquired in nontaxable deals. Also, consistent with Ayers et al. (2004) we predict that the

coefficient on the interaction term Fed CG Rate × TI Inst Own, , is negative. As the percentage

of shareholders that are tax-exempt increases, the tax effect is mitigated. After establishing these

results from Ayers et al. (2004) in our sample, we modify Equation 1 by introducing our proxy for

insider ownership, Inside Own, and we estimate the following regression:

(2)

We predict a positive coefficient on the interaction term of Fed CG Rate × Inside Own,

, — when insiders own more of the firm, target firms show a stronger preference to be acquired

in nontaxable deals. We do not have a prediction about the coefficients and . The coefficients

may remain significant if the insiders’ tax incentives provide an incremental effect. However, if

the tax effects only become significant in the presence of insider ownership, then the main effect

on shareholder-level taxes as well as the incremental effect of institutional investors may be zero.

We construct our proxies for insider ownership (Inside Own) using data from the Thomson

Financial Insiders Data Feed (TFN), which contains trade information from officers, directors, and

principal stockholders with holdings greater than 10 percent of a firm’s stock. Although TFN was

not originally designed to capture insider holdings, per se, it is possible (and WRDS provides

instructions on how) to construct total insider holdings at a given point in time from the data. We

employ this data source and the following methodology rather than using Execucomp data in order

to obtain a larger sample (we obtain roughly 500 deals if we use Execucomp data because that

sample contains only the S&P 1500 firms). The TFN database is designed to capture all U.S.

insider activity as reported on SEC Forms 3, 4, 5, and 144, which insiders are required to file when

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they trade in their companies’ stock. The forms contain the date of the transaction, the number of

shares bought or sold, the price of the shares at the time, and the number of shares the insider

continues to hold after the transaction. In addition, insiders are required to report both direct and

indirect holdings in the firm (e.g., shares held by a spouse, child, or trust as well as shares held

directly by the insider). To construct our estimate of total insider holdings, we follow the

recommended procedure described in WRDS. Specifically, for each insider we find the direct

holdings with the highest sequence number for each document control number (DCN) associated

with that insider and add to it all of the indirect holdings reported for that same DCN.

One limitation to using TFN to construct insider holdings is that they are reported only

when there is a transaction rather than at regular intervals.9 As a result, in some cases we can view

insider holdings at several different points during a year (e.g., an individual who trades frequently),

but in other cases there may be longer lapses in between reports of insider holdings (e.g., an

individual who has not made any trades for months or even years). We estimate insider holdings

for each deal as being the insider’s total holdings at the most recently observed point prior to the

completion of the deal, stretching back as far as two years prior to the date of deal completion.10

After estimating each insider’s total holdings, we use two proxies to represent the

percentage of the firm held by insiders. CEO Holdings represents the percentage of the firm held

                                                            9 The primary advantage to using TFN to estimate insider holdings rather than another database such as ExecuComp is that TFN covers all public firms whereas ExecuComp is limited to firms in the S&P 1500. Since we require insider holdings for all target firms, having access to all public firms allows for a much richer analysis than limiting the sample to acquisitions of S&P 1500 firms. To alleviate concerns about the accuracy of insider holding estimates using TFN, we perform two robustness checks. First, we compare estimates of CEO holdings obtained using TFN and ExecuComp for acquisitions of S&P 1500 firms and find that the estimates have a Pearson (Spearman) correlation of 0.72 (0.71). Second, we hand-check proxy statements for a randomly selected subsample of target firms in 100 deals, and we find that in most cases the estimate of CEO holdings obtained using TFN is very similar (often identical) to that reported in the proxy statement. 10 Note that our inferences are unchanged if we allow this window of observation to extend back to three years prior to deal completion, or if we limit it to just one year prior to deal completion.

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by the CEO, and Top 5 Holdings represents the percentage of the firm held by the five executives

with the largest insider holdings.

Research Design – Acquisition Premium Analysis (Hypothesis 2)

To test insider tax effects on acquisition premiums, H2, we begin by replicating the primary

results in Ayers et al. (2003) during our more recent sample period. Using our sample of taxable

acquisitions, we estimate the following regression:

(3)

Target Premium represents the acquisition premium paid to the target firm. We follow Ayers et al.

(2003) and measure the premium as the acquisition price less the target’s market value 40 days

prior to the public announcement of the deal, scaled by the target’s market value 40 days prior to

the acquisition announcement.

In terms of controls, we follow Ayers et al. (2003) and control for a number of target firm

characteristics, including the target’s book-to-market value of equity, ROA, leverage, current

assets, and net operating losses.11 As in the structure analysis, we add target firm size to the set of

control variables used in Ayers et al. (2003). In addition, we control for several deal characteristics

such as whether the bid was hostile in nature, whether there was a competing bidder, the bidder’s

prior ownership of the target, or toehold, and whether the bid was a tender offer. Details on variable

construction are contained in Appendix A. All other variables are constructed as described above.

Following Ayers et al. (2003), we predict a positive coefficient on Fed CG Rate, , and a

negative coefficient on the interaction term Fed CG Rate, . When capital gains tax rates are

                                                            11 Note that Ayers et al. (2003) control for the target firm’s ROE rather than ROA. We opt to control for ROA in our tests regarding acquisition premiums to maintain consistency with our tests regarding acquisition structure. But in untabulated analyses we find that our inferences are unchanged if we follow Ayers et al. (2003) and control for ROE.

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higher, target firm shareholders demand a higher premium to sell their shares in a taxable deal, but

the effect is mitigated when the firm has a large tax-insensitive investor base.

After establishing this result first shown in Ayers et al. (2003), we modify Equation 3 by

introducing our proxy for insider ownership, Inside Own, and we estimate the following

regression:

(4)

Similar to our predictions in the acquisition structure analysis, we predict a positive

coefficient on the interaction term Fed CG Rate × Inside Own, , consistent with higher premiums

being demanded when insiders own more of the firm. We do not have a prediction about the

coefficients and in equation (4). The coefficients may remain significant if the insiders

provide an incremental effect of tax incentives. However, if the tax effects only become significant

in the presence of insider ownership, then the main effect on shareholder-level taxes as well as its

interaction with institutional investors may be zero.

IV. EMPIRICAL RESULTS

Descriptive Statistics

Table 2 Panel A presents descriptive statistics for the variables for H1, tests of acquisition

structure. The data show that 44 percent of our sample deals are nontaxable. This is slightly lower

than, but still comparable to, the 53 percent of deals found to be nontaxable in Ayers et al. (2004).

The data also show that on average, tax-insensitive institutional investors hold 44 percent of the

firm’s shares, whereas tax-sensitive institutional investors own 7 percent of the firm. These

amounts combine to form a total comparable to the mean institutional investor ownership of 47

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percent found in Ayers et al. (2003).12 Table 2 Panel A also shows that on average, the target firm

CEO holds three percent of the firm’s outstanding shares, while the top five executives together

own eleven percent of the firm. Panel B shows that the mean acquisition premium in our sample

is 46 percent, which is slightly lower than, but still comparable to, the mean premium in Ayers et

al. (2004) of 55 percent.

Acquisition Structure – Main Results

Table 3 presents the results from estimating Equations 1 and 2. The first column displays

a replication of the main result from Ayers et al. (2004) in our more recent sample period. Namely,

the positive coefficient on Fed CG Rate (coef.=0.021; t-stat=2.05) indicates that target firms are

more likely to be acquired in tax-free deals when tax rates are high. The negative coefficient on

Fed CG Rate × TI Inst Own (coef.=-0.042; t-stat=-2.01) is consistent with the tax effect being

mitigated when the firm’s investor base is made up in large part by tax-insensitive investors.

Coefficients on the other control variables are generally consistent with Ayers et al. (2004).

In the second column of Table 3, we introduce the Inside Own variable, reflecting the

percentage of the firm held by the CEO at the time of the acquisition. The coefficient on Fed CG

Rate × Inside Own is positive and significant (coef.=0.317; t-stat=3.46) indicating that target firms

are significantly more likely to be acquired in tax-free deals relative to taxable deals when CEOs

hold more shares in the firm. We interpret the result as being consistent with H1. In addition, the

coefficients on Fed CG Rate and on Fed CG Rate × TI Inst Own are no longer significant when

our variable for insider holdings is included in the regression. This result suggests that the target-

                                                            12 When Ayers et al. wrote their studies, they conducted the state of the art tests at the time using total institutional ownership to proxy for tax-exempt shareholders (shareholders where any tax incentives should be less or zero). Recent studies (e.g., Moser, 2007 and Blouin et al., 2017) have provided finer partitions of the institutional ownership data. We employ the more recent data partitions. We also estimate our tests using total institutional ownership and obtain inferences that are unchanged.

17  

shareholder tax effect documented in Ayers et al. is concentrated in companies where insiders own

a relatively large portion of the company stock.

In the third column of Table 3, we replace CEO ownership with total ownership by the five

largest executive shareholders in the firm. The coefficient on Fed CG Rate × Inside Own is again,

positive and significant (coef.=0.146, t-stat=2.91). Thus, the evidence is consistent with H1 using

both proxies for insider ownership.

Acquisition Premiums – Main Results

Table 4 presents the results of our tests of H2, estimations of Equations 3 and 4. The first

column displays a replication of the main result from Ayers et al. (2003) in our more recent sample

period. The positive coefficient on Fed CG Rate (coef.=0.017; t-stat=2.60) is consistent with

higher premiums being paid in taxable deals when shareholder-level capital gains tax rates are

high. The negative coefficient on Fed CG Rate × TI Inst Own (coef.=-0.020; t-stat=-1.88) indicates

that this effect is decreasing in the percentage of tax-insensitive investors, consistent with Ayers

et al. (2003).

In the second column of Table 4, we introduce the Inside Own variable, reflecting the

percentage of the firm held by the CEO at the time of the acquisition. The coefficient on Fed CG

Rate × Inside Own is positive and significant (coef.=0.262; t-stat=2.35), consistent with H2. We

interpret the evidence as being consistent with higher capital gains tax rates being associated with

higher acquisition premiums in taxable deals when CEOs hold more shares in the firm.

Furthermore, similar to Table 3, the coefficients on Fed CG Rate and Fed CG Rate × TI Inst Own

are smaller and no longer statistically significant when the variable for insider holdings is included.

This set of results suggest that the shareholder-level tax incentives affect acquisition premiums but

that the relation is mainly driven by the insiders.

18  

In the third column of Table 4, we replace CEO ownership with total ownership by the five

largest executive shareholders in the firm. The positive coefficient on Fed CG Rate × Inside Own

suggests that our inferences regarding CEO ownership hold using either measure of insider

ownership.

The fourth column of Table 4 displays the results of a falsification test, in which we

investigate the effect of tax rates and inside ownership on premiums in 564 tax-free, stock-for-

stock, mergers. Since the receipt of stock by the target shareholders does not trigger a taxable

event, we do not expect higher tax rates to cause inside owners to demand higher acquisition

premiums. As discussed above, Ayers et al. (2003) found some evidence consistent with a tax

effect for nontaxable deals in some cases. The authors conjectured that one reason might be that if

shareholders plan to sell the shares obtained in the stock-for-stock deal they would still face a tax

and perhaps demand to be compensated for this tax upon the acquisition transaction. In our tests,

however, we do not find evidence consistent with a statistically significant positive tax effect on

premiums for tax-free (deferred) deals. Thus, in nontaxable deals, insiders’ tax liabilities are not

positively associated with higher acquisition premiums.13

V. ADDITIONAL ANALYSIS

We perform several additional analyses to verify the robustness of our main findings and

to further explore the nature of the relation between insiders’ tax incentives and acquisition

outcomes. First, we repeat our analyses of acquisition structure and premiums after restricting our

focus to the years adjacent to changes in tax regimes. Second, we study the impact of variation in

                                                            13 Indeed, in our tests the coefficient on Fed CG Rate × Inside Own is negative and significant at the 10 percent level (one-tailed). We did not have an ex ante prediction about this, nor do we have an ex post explanation.

19  

state-level tax rates. And last, we separately investigate the effects of target shareholder tax

incentives on merger bid outcomes by public and private bidders.

Adjacent Regime Analysis

To provide additional support for our hypotheses and to examine whether the relation

between insiders’ tax incentives and acquisition outcomes is driven by one particular tax regime

change, we follow Ayers et al. (2004) and estimate Equations 2 and 4 after restricting the sample

to acquisitions in adjacent tax regimes.14 As discussed above, for our sample period there are three

capital gains tax rate changes. Specifically, the 1997 tax cut (8 percentage points), the 2003 tax

cut (5 percentage points), and the 2013 capital gains rate increase (8.8 percentage points).

To conduct this analysis we estimate the following:

(5)

Post Tax Change is an indicator variable equal to one for acquisitions completed on or after

the date on which the new tax rate becomes effective, and equal to zero otherwise. The intuition

in this test is that rather than including the capital gains tax rate, we include a Post indicator

variable for years after the rate changes. The prediction is that when the capital gains rate increases,

nontaxable deals will be more likely relative to taxable deals compared to the time period when

the tax rates were lower. The opposite is predicted when the tax rates decrease – selling

shareholders should be more willing to accept a taxable deal relative to a nontaxable deal compared

to the earlier, higher tax rate period. For purposes of our hypotheses, we include and interact our

                                                            14 This test can also be interpreted as employing another way to measure capital gains rates. Rather than including the rate directly in each year as we do in our main analyses, we include a limited number of years surrounding a tax rate change. The years in the post period have a higher or lower rate than the years in the pre-period.

20  

measures of insider holdings to examine the differential effect of insider holdings. In these tests,

we employ only CEO ownership as our measure of insider ownership in the interest of parsimony.

All other variables are defined as above.

The first column of Table 5 Panel A reveals a negative coefficient on Post Tax Change ×

Inside Own (coef.=-3.668; t-stat=-1.82), consistent with target firms with high CEO ownership

being less likely to be acquired in tax-free deals, relative to taxable deals, after the 1997 tax cut

reduced the top tax rate from 28% to 20%. Similarly, the second column displays a negative

coefficient on Post Tax Change × Inside Own (coef.=-1.892; t-stat=-2.49), consistent with the

likelihood of target firms with high CEO ownership being acquired in tax-free deals declining even

more following the 2003 tax rate drop from 20% to 15%. In other words, taxable deals are less

costly in a relative sense. In contrast, the third column shows a positive coefficient on Post Tax

Change × Inside Own (coef.=3.322; t-stat=2.13), consistent with target firms with high CEO

ownership being more likely to be acquired in tax-free deals, relative to taxable deals, after the

capital gains tax rate increased to 23.8% in 2013.

We report the results of a similar adjacent regime analysis with respect to acquisition

premiums in Table 5 Panel B. Recall that in this test the sample includes only taxable transactions.

As with the structure analysis, the first two columns display negative coefficients on Post Tax

Change × Inside Own (although the coefficient with respect to the 2003 tax cut is only marginally

significant), indicating lower premiums in taxable acquisitions for target firms with high CEO

ownership following tax cuts. The third column displays a positive and significant coefficient on

Post Tax Change × Inside Own (coef.=4.140; t-stat=2.40), consistent with increased premiums in

taxable acquisitions for high CEO ownership firms after the 2013 tax increase.

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Economically, we find that the 1997 and 2013 tax changes (a drop of 8 percentage points

and an increase of 8.8 percentage points, respectively) led to comparable shifts in both the

probability of high CEO ownership firms being acquired in tax-free deals as well as changes in

taxable acquisition premiums. However, the shifts in response to the 2003 tax cut were smaller in

magnitude, consistent with the smaller change in the tax rate (a drop of 5 percentage points).

Overall, the results indicate that each tax change affected target firm CEOs’ tax incentives in the

predicted direction, driving shifts in acquisition structure and premiums. Thus, our results and

inferences obtain using an alternative methodology and our primary results in Tables 3 and 4 do

not seem to be driven by any one tax regime change.

State Taxes Analysis

As an alternative measure of tax rates, we examine the effects of state taxes on acquisition

structure and premiums. Our measure of the state tax rate, State CG Rate, is set equal to the

maximum state long-term gains tax rate applicable to individuals in the state in which the target

firm is headquartered, at the effective date of the acquisition.15 Thus, when determining the

applicable state tax rate for firm insiders, we assume the insiders reside in the state in which the

firm is headquartered. To the extent this assumption is inaccurate, the State CG Rate variable is

measured with error. Similar to our federal tax rate variable, Fed CG Rate, we shift State CG Rate

to be centered around zero by reducing the statutory rates by 5 percentage points, such that its

values range from -5.0 percent to 9.1 percent.16 We obtain state tax rate data from the National

Bureau of Economic Research.

                                                            15 Compustat’s location data suffers from an error in that it reports the address of a firm’s current principal executive office, not its historic headquarters location. Heider and Ljungqvist (2015) collect corrected firm headquarters data for the years 1989-2011, and Alexander Ljungqvist generously agreed to share the corrected data. Accordingly, our data reflect the corrected historical firm headquarters. 16 Note that our inferences are unaffected if we use the unadjusted state statutory tax rates for State CG Rate.

22  

The state tax setting offers two advantages over the federal setting. First, there is

substantially more variation in state tax rates during our sample period than in federal tax rates.

Not only do most states have unique tax rates (rather than a uniform federal tax rate applying to

all deals at a given point in time), there are also more changes in state tax rates that we exploit by

including state fixed effects in some specifications. Second, the state tax setting helps to address

the concern that our tax rate variable is picking up incentives of outside shareholders, because a

given state’s taxes apply only to shareholders who reside in that state. Thus while a state’s taxes

are likely to apply to employees of the firm, including insiders, who tend to reside near the firm

headquarters, they will not apply to investors who live in other states, allowing us to more

confidently attribute acquisition outcome responses to the tax incentives of insiders.17

To perform our state tax analysis, we modify Equations 2 and 4 by replacing Fed CG Rate

with State CG Rate, but otherwise retain the same specification for consistency. Table 6 Panel A

displays the results of regressions estimating the impact of target firm CEOs’ state tax rates on

acquisition structure. The specifications across the columns are the same, except the fixed effects

structure varies. The first column includes the same controls for five-year intervals and SIC 1-digit

fixed effects as in the prior analyses, and yields a positive coefficient on State CG Rate × Inside

Own (coef.=0.143; t-stat=2.30), consistent with high CEO-ownership target firms facing higher

state tax rates being more likely to be acquired in tax-free deals. The second column replaces the

five-year interval controls with year fixed effects, and yields the same inferences (coef.=0.144; t-

stat=1.89). In the third column, we include state fixed effects to remove any time-invariant

                                                            17 Of course, to the extent that investors are subject to local bias, or investing in firms located in their state (e.g., Ivkovic and Weisbenner, 2005), the state tax setting will not entirely rule out the concern that our tax rate variable reflects the incentives of other investors besides investors.

23  

geographic bias, and observe the within-state effect of CEOs’ tax liabilities on acquisition structure

outcomes. After including state fixed effects, the results continue to hold.

We report the results of a similar state tax analysis with respect to acquisition premiums in

Table 6 Panel B. We find a significantly positive coefficient (coef.=0.151; t-stat=2.15) on State

CG Rate × Inside Own, indicating that high CEO-ownership target firms acquired in high tax states

receive higher premiums. Our inferences continue to hold when we include year fixed effects and

state fixed effects.

Overall, the results in Table 6 are consistent with shareholder-level state taxes having an

effect on acquisition structure and value as insider holding increase. The results from the state

setting help to buttress our primary findings from the federal setting, and mitigate concerns about

the tax rate variables reflecting tax incentives of outside shareholders.

Public and Private Bidder Analysis

We investigate the nature of the relation between target firm insider tax incentives and

acquisition outcomes when the bidder is public as compared to when the bidder is private. Our

rationale for this analysis follows from the observation that public firm bidders can respond to

target firm insider tax incentives in two ways: structure the deal as a tax-free acquisition by offering

stock, or offer cash in a taxable deal but pay a higher premium. But private firm bidders have more

limited flexibility in this regard, because their stock is not publicly traded making it less useful as

a form of currency (Celikyurt, Sevilir, and Shivdasani 2010). Thus private firm bidders are more

constrained to respond to target firm insider tax preferences, and likely often have no choice but

to pay a higher premium in a cash offer. We investigate this prediction by estimating Equations 2

and 4 for deals with public bidders and private bidders separately.

24  

Table 7 Panel A displays the results of the acquisition structure analysis for public and

private bidders separately. The first column shows a positive and significant coefficient on Fed

CG Rate × Inside Own (coef.=0.290; t-stat=3.22), indicating that public bidders respond to target

insider tax incentives by offering stock in tax-free deals. The second column, however, shows an

insignificant coefficient on Fed CG Rate × Inside Own (coef.=0.079; t-stat=0.70), suggesting that

private firm bidders lack the flexibility to respond to target tax incentives by offering stock in a

nontaxable deal.

Table 7 Panel B completes the analysis by presenting the results for acquisition premiums

in taxable deals with public and private bidders. The first column shows an insignificant coefficient

on Fed CG Rate × Inside Own (coef.=-0.077; t-stat=-0.43), indicating that public bidders do not

respond to target tax incentives by offering higher premiums. However, the second column shows

a positive and significant coefficient on Fed CG Rate × Inside Own (coef.=0.456; t-stat=3.39),

indicating that private bidders respond to target tax incentives by offering substantially higher

premiums in taxable deals.

Overall, the results in Table 7 reveal that when faced with target firm insider tax

preferences, public bidders choose to placate those shareholders by offering stock in a tax-free

deal. However, private bidders lack the option of using their own stock as currency in a tax-free

deal, so they must respond to target firm insider tax preferences with the only lever available to

them – offering higher premiums in a taxable cash acquisition.

VI. CONCLUSION

This study investigates the effect of target firm insiders’ capital gain tax liabilities on

acquisition structure and value. We hypothesize and find that the shareholder-level tax effects

25  

documented in Ayers et al. (2003 and 2004) are primarily driven by the tax effects of insiders. The

key innovation in our paper is that we expect the effect of shareholder taxes on acquisition structure

and value to increase as insider ownership increases. The intuition behind our hypotheses is that

insiders are in a better position to take shareholder tax liabilities into account when negotiating a

deal and that insiders will care about shareholder-level taxes when they bear those taxes

themselves. In other words, when insiders’ interests are aligned with shareholders, shareholder-

level taxes will have the strongest effect. We conduct additional tests, including tests around three

different capital gains tax rate changes and employing state-level taxes, and find results that

support our hypotheses.

Our study contributes to our understanding of what taxes and whose taxes affect acquisition

structure and value. An overriding question in the literature is whether firm management considers

shareholder-level taxes in decision-making. We confirm that shareholder level taxes matter in

acquisitions but find that the effects of shareholder-level taxes only exist as insiders hold more of

the firm. We interpret the evidence as being consistent with Hanlon and Hoopes (2016) who

examine payout policy — the evidence in both settings suggests that shareholder-level tax matter

when insiders are relatively large shareholders, i.e., when their incentives are aligned with

shareholders.

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on acquisition structure. The Accounting Review 79, 859-884. Ayers, B., Lefanowicz, C., Robinson, J., 2007. Capital gains taxes and acquisition activity:

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Quarterly Journal of Economics 68, 1169-1208. Blouin, J., Bushee, B., Sikes, S., 2017. Measuring tax-sensitive institutional investor ownership.

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division between the stockholders of target and acquiring firms. Journal of Financial Economics 21, 3-40.

Brown, D., Ryngaert, M., 1991. The mode of acquisition in takeovers: Taxes and asymmetric

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The Accounting Review 85, 1163-1189. Erickson, M., 1998. The effect of taxes on the structure of corporate acquisitions. Journal of

Accounting Research 36, 279-298. Graham, J., 1996. Proxies for the marginal tax rate. Journal of Financial Economics 42, 187-221. Hanlon, M., Heitzman, S., 2010. A review of tax research. Journal of Accounting and Economics

50, 127-178. Hanlon, M., Hoopes, J., 2014. What do firms do when dividend tax rates change? An examination

of alternative payout responses. Journal of Financial Economics 114, 105-124. Hanlon, M., Lester, R., Verdi, R., 2015. The effect of repatriation tax costs on U.S. multinational

investment. Journal of Financial Economics 116, 179-196.

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Hartzell, J., Ofek, E., Yermack, D., 2004. What’s in it for me? CEOs whose firms are acquired.

Review of Financial Studies 17, 37-61. Heider, F., Ljungqvist, A., 2015. As certain as debt and taxes: Estimating the tax sensitivity of

leverage from state tax changes. Journal of Financial Economics 118, 684-712. Huang, Y.S., Walkling, R., 1987. Target abnormal returns associated with acquisition

announcements: Payment, acquisition form, and managerial resistance. Journal of Financial Economics 19, 329-349.

Ivkovic, Z., Weisbenner, S., 2005. Local does as local is: Information content of the geography of

individual investors’ common stock investments. Journal of Finance 60, 267-306. Jenter, D., Lewellen, K., 2015. CEO preferences and acquisitions. Journal of Finance 70, 2813-

2852. Landsman, W., Shackelford, D., 1995. The lock-in effect of capital gains taxes: Evidence from the

RJR Nabisco leveraged buyout. National Tax Journal 48, 245-259. Mandelker, G., 1974. Risk and return: The case of merging firms. Journal of Financial Economics

1, 303-335. Moser, W. 2007. The effect of shareholder taxes on corporate payout choice. Journal of Financial

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Accounting Review, forthcoming.

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APPENDIX A Variable Definitions

This table provides a detailed description of the procedures used to compute each variable used in the analyses. The data are obtained through Compustat, CRSP, and Thomson Reuters. We use data from Brian Bushee’s website, http://acct.wharton.upenn.edu/faculty/bushee/IIclass.html, to classify institutional investors as tax-sensitive (i.e., Blouin et al. 2017). In addition, we use corrected Compustat headquarters location data from Alexander Ljungqvist. The insider ownership variables, CEO Holdings and Top 5 Holdings, are winsorized at the 5% and 95% levels of the distribution to mitigate the effect of outliers. All other continuous variables are winsorized at the 1 percent and 99 percent levels. Dependent variables:

Variable Definition

Nontaxable Deal An indicator variable equal to one if the acquisition is a tax-free stock-for-stock acquisition, and zero otherwise. Deals are classified as stock-for-stock acquisitions if greater than 50% of the purchase price is made using stock, according to SDC Platinum.

Target Premium The acquisition price less the target’s market value 40 days prior to the first public announcement of a pending acquisition, deflated by the target’s market value 40 days prior to the acquisition announcement.

Tax rate variables:

Variable Definition

Fed CG Rate

The maximum federal long-term capital gains tax rate for individual investors at the acquisition date, shifted to be centered around zero. We shift Fed CG Rate to center around zero by reducing the statutory tax rate by 20 percentage points, such that Fed CG Rate ranges from -5.0 to 8.0 percent.

State CG Rate

The maximum state long-term capital gains tax rate for individual investors at the acquisition date, for the state in which the target firm is headquartered, shifted to be centered around zero. We shift State CG Rate to center around zero by reducing the statutory tax rates by 5 percentage points, such that State CG Rate ranges from -5.0 to 9.1 percent.

Ownership variables:

Variable Definition

CEO Holdings

The percentage of common stock owned by the CEO of the acquired firm prior to the acquisition announcement. Using data from the TFN Insider Filing Data Files, the CEO’s total holdings are determined for each year by adding together the total direct holdings and total indirect holdings for the CEO, as of the transaction date closest to but prior to year-end.

Top 5 Holdings

The percentage of common stock owned by the top five largest inside shareholders of the acquired firm prior to the acquisition announcement. Using data from the TFN Insider Filing Data Files, each insider’s total holdings are determined for each year by adding together the total direct holdings and total indirect holdings for the CEO, as of the transaction date closest to but prior to year-end.

TI Inst Own

The percentage of common stock owned by tax-insensitive institutional investors of the acquired firm prior to the acquisition announcement. Tax-insensitive investors are identified using the investor classification data on Brian Bushee’s website, http://acct.wharton.upenn.edu/faculty/bushee/IIclass.html, (Blouin et al. 2017).

TS Inst Own

The percentage of common stock owned by tax-insensitive institutional investors of the acquired firm prior to the acquisition announcement. Tax-sensitive investors are identified using the investor classification data on Brian Bushee’s website, http://acct.wharton.upenn.edu/faculty/bushee/IIclass.html, (Blouin et al. 2017).

29  

APPENDIX A (continued)

Control variables: Variable Definition

Ret 5yr The cumulative monthly return of the target firm during the five years preceding the acquisition announcement date.

Target BTM The ratio of the target’s book value of common equity to the target’s market value 40 days prior to the acquisition announcement.

Target ROA The ratio of target income before extraordinary items to total assets.

Target Size Natural log of one plus the target’s market value 40 days prior to the acquisition announcement.

Target Leverage The ratio of target long-term debt to the target’s market value 40 days prior to the acquisition announcement.

Target Current Assets

The ratio of target current assets to the target’s market value 40 days prior to the acquisition announcement.

Target NOL The product of the target’s net operating loss and the maximum federal corporate tax rate applicable at the acquisition effective date, deflated by the target’s market value 40 days prior to the acquisition announcement.

Hostile An indicator variable equal to one if the target’s management opposed the acquisition, and zero otherwise.

Competing Bid An indicator variable equal to one if there was a competing bidder for the target, and zero otherwise.

Toehold A continuous variable representing the percentage ownership of the bidder in the target prior to the first public announcement of a pending acquisition.

Tender An indicator variable equal to one if the acquisition of the target was initiated with a tender offer, and zero otherwise.

S&P 500 Index Change

The change in the Standard & Poor’s 500 (S&P) index for the 12 months preceding the acquisition calculated as the natural log of the ratio of the S&P index for the month preceding the acquisition divided by the S&P index 13 months preceding the acquisition.

Bidder MTB The ratio of the bidder’s market value of its common stock 40 days prior to the acquisition announcement to its book value of common equity.

Bidder NOL The bidder’s net operating loss at the acquisition date, deflated by the bidder’s market value 40 days prior to the acquisition announcement.

Bidder MTR

Graham’s (1996) trichotomous tax rate, which equals the maximum statutory corporate tax rate at the acquisition date if the bidder has positive taxable income and no net operating losses, one-half the maximum corporate tax rate if the bidder has negative taxable income or net operating losses, and zero if the bidder has both negative taxable income and net operating losses.

Bidder Inst Own The percentage of common stock owned by institutional investors of the acquiring firm prior to the acquisition announcement.

Bidder Runup Bidder abnormal returns cumulated over the period from 286 days through 41 days prior to the acquisition announcement. We estimate abnormal returns using the bidder’s raw returns adjusted for the value-weighted index over the same period.

Bidder Cash Value The sum of the bidder’s cash and short-term investments divided by the acquisition price.

Relative Size The ratio of the target’s market value 40 days prior to the acquisition announcement to the sum of the target and bidder’s market value 40 days prior to the acquisition announcement.

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TABLE 1 Number of deals by year and industry

Panel A: Number of deals by year

*The top federal capital gains tax rate for individuals was reduced from 28% to 20% effective May 7, 1997.

Year CG Tax Rate Taxable Nontaxable Total Public Taxable Nontaxable Total PrivateTotal

TaxableTotal

Nontaxable Total Deals

1996 28% 5 10 15 3 3 6 8 13 211997 28% / 20%* 21 50 71 29 5 34 50 55 1051998 20% 31 61 92 39 6 45 70 67 1371999 20% 54 63 117 58 11 69 112 74 1862000 20% 52 49 101 63 18 81 115 67 1822001 20% 35 45 80 41 9 50 76 54 1302002 20% 18 23 41 21 1 22 39 24 632003 15% 29 25 54 32 0 32 61 25 862004 15% 32 23 55 21 1 22 53 24 772005 15% 34 23 57 47 0 47 81 23 1042006 15% 56 15 71 59 0 59 115 15 1302007 15% 64 16 80 102 1 103 166 17 1832008 15% 34 15 49 51 2 53 85 17 1022009 15% 22 14 36 22 3 25 44 17 612010 15% 38 10 48 56 0 56 94 10 1042011 15% 20 10 30 70 3 73 90 13 1032012 15% 36 9 45 49 0 49 85 9 942013 23.8% 30 16 46 47 1 48 77 17 942014 23.8% 7 5 12 7 2 9 14 7 212015 23.8% 4 5 9 9 1 10 13 6 192016 23.8% 7 5 12 8 5 13 15 10 25

Totals 629 492 1,121 834 72 906 1,463 564 2,027

Public Acquirers Private Acquirers

31  

TABLE 1 (continued) Panel B: Number of deals by industry Industry Taxable Deals Nontaxable Deals Total DealsSIC 0000 Agriculture, forestry, and fishing 6 1 7SIC 1000 Metal and mining 40 27 67SIC 2000 Food, textile, and chemicals 214 48 262SIC 3000 Rubber, metal, and machines 374 137 511SIC 4000 Transportation and utilities 107 52 159SIC 5000 Wholesale and retail trade 152 25 177SIC 6000 Financial services 183 138 321SIC 7000 Hotel and other services 299 118 417SIC 8000 Health and engineering services 88 18 106Totals 1,463 564 2,027

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TABLE 2 Descriptive statistics

Panel A (Panel B) presents the descriptive statistics for the variables of interest in the acquisition structure (premium) analysis. The sample in Panel A reflects all completed deals (taxable and nontaxable) of public target firms by public acquirers which contain the necessary data for the years 1996 to 2016. The sample in Panel B reflects all completed taxable deals of public target firms by public and private acquirers which contain the necessary data for the years 1996 to 2016. Details of variable construction are contained in Appendix A. Panel A: Descriptive statistics for acquisition structure analysis

The * at the end of Fed CG Rate and State CG Rate indicates that the variables are not adjusted in the table above, but when used as independent variables in our regressions they are shifted to be centered around zero.

Variables N Mean SD P25 P50 P75Dependent variable:

Nontaxable Deal 1,121 0.44 0.50 0.00 0.00 1.00Tax rate variables:

Fed CG Rate* 1,121 18.13 3.30 15.00 20.00 20.00State CG Rate* 1,121 5.77 3.61 3.07 5.83 8.97

Ownership variables:CEO Holdings 1,121 0.03 0.04 0.00 0.01 0.03Top 5 Holdings 1,121 0.11 0.14 0.01 0.05 0.15TI Inst Own 1,121 0.44 0.27 0.22 0.43 0.67TS Inst Own 1,121 0.07 0.07 0.02 0.05 0.09

Control variables:Ret 5yr 1,121 0.81 1.09 0.19 0.74 1.37Target BTM 1,121 0.61 0.56 0.28 0.45 0.73Target ROA 1,121 -0.04 0.24 -0.03 0.02 0.07Target Size 1,121 5.86 1.81 4.51 5.80 7.11Hostile 1,121 0.01 0.09 0.00 0.00 0.00Competing Bid 1,121 0.05 0.21 0.00 0.00 0.00S&P 500 Index Change 1,121 -0.05 0.17 -0.16 -0.08 0.02Bidder BTM 1,121 0.45 0.32 0.22 0.38 0.59Bidder NOL 1,121 0.08 0.29 0.00 0.00 0.01Bidder MTR 1,121 0.26 0.11 0.17 0.35 0.35Bidder Inst Own 1,121 0.41 0.34 0.00 0.42 0.71Bidder Runup 1,121 0.11 0.50 -0.17 0.03 0.27Bidder Cash Value 1,121 3.74 11.01 0.13 0.66 2.16Relative Size 1,121 0.17 0.17 0.03 0.10 0.27

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TABLE 2 (continued) Panel B: Descriptive statistics for acquisition premium analysis

The * at the end of Fed CG Rate and State CG Rate indicates that the variables are not adjusted in the table above, but when used as independent variables in our regressions they are shifted to be centered around zero.

Variables N Mean SD P25 P50 P75Dependent variable:

Target Premium 1,463 0.46 0.37 0.22 0.37 0.59Tax rate variables:

Fed CG Rate* 1,463 17.40 3.16 15.00 15.00 20.00State CG Rate* 1,463 5.62 3.62 3.07 5.82 8.24

Ownership variables:CEO Holdings 1,463 0.03 0.05 0.00 0.01 0.03Top 5 Holdings 1,463 0.11 0.14 0.01 0.05 0.16TI Inst Own 1,463 0.46 0.27 0.24 0.45 0.69TS Inst Own 1,463 0.08 0.07 0.03 0.06 0.11

Control variables:Target BTM 1,463 0.66 0.55 0.33 0.53 0.83Target ROA 1,463 -0.01 0.19 -0.01 0.03 0.07Target Size 1,463 5.61 1.70 4.33 5.57 6.79Target Leverage 1,463 0.37 0.73 0.00 0.10 0.42Target Current Assets 1,463 0.61 0.72 0.21 0.40 0.73Target NOL 1,463 0.11 0.36 0.00 0.00 0.03Hostile 1,463 0.01 0.09 0.00 0.00 0.00Competing Bid 1,463 0.06 0.25 0.00 0.00 0.00Toehold 1,463 1.25 5.74 0.00 0.00 0.00Tender 1,463 0.32 0.47 0.00 0.00 1.00

34  

TABLE 3 The effect of target managers’ capital gains taxes on acquisition structure

This table presents the results from estimating an OLS regression to estimate the effects of target insider ownership and other determinants on acquisition structure. The dependent variable equals one for tax-free stock-for-stock acquisitions, and zero otherwise. Variables are defined in Appendix A. All specifications include controls for (one-digit SIC code) industry effects and five-year acquisition periods. The t-statistics are reported below coefficient estimates in parentheses and are calculated using robust standard errors. *,**,*** indicate statistical significance at the 0.10, 0.05, and 0.01 levels, respectively, using a one-tailed t-test where we have a prediction, a two tailed t-test otherwise. We also use a one-tailed for the Ayers et al. (2003 and 2004) test variables.

Dependent Variable:Inside Own Proxy: Pr. Sign CEO Holdings Top 5 HoldingsFed CG Rate +,0,0 0.021** 0.009 0.003

(2.05) (0.60) (0.17)Fed CG Rate × TI Inst Own -,0,0 -0.042** -0.030 -0.024

(-2.01) (-1.23) (-0.93)TI Inst Own -0.456*** -0.443*** -0.417***

(-4.43) (-3.20) (-2.91)Fed CG Rate × Inside Own + 0.317*** 0.146***

(3.46) (2.91)Inside Own 0.114 0.336**

(0.23) (1.82)Ret 5yr -0.027 -0.033 -0.030

(-0.83) (-1.05) (-0.96)Fed CG Rate × Ret 5yr 0.002 0.000 0.001

(0.27) (0.03) (0.12)Fed CG Rate × TI Inst Own × Ret 5yr 0.034** 0.036* 0.034*

(2.20) (1.94) (1.87)TI Inst Own × Ret 5yr 0.149** 0.156* 0.151*

(2.30) (1.95) (1.87)Target BTM 0.052 0.049 0.051

(1.60) (1.31) (1.43)Target ROA -0.235*** -0.233*** -0.235***

(-3.83) (-4.50) (-4.65)Target Size 0.049*** 0.047*** 0.049***

(4.31) (3.10) (3.43)Hostile -0.291* -0.284** -0.274**

(-1.80) (-2.49) (-2.37)Competing Bid -0.070 -0.072 -0.073

(-1.24) (-1.25) (-1.22)S&P 500 Index Change 0.055 0.052 0.052

(0.74) (0.75) (0.75)Bidder BTM -0.114** -0.111 -0.111

(-2.15) (-1.49) (-1.48)Bidder NOL 0.129*** 0.128*** 0.130***

(2.82) (2.84) (2.86)Bidder MTR -0.056 -0.056 -0.051

(-0.40) (-0.38) (-0.35)Bidder Inst Own -0.156*** -0.157*** -0.157***

(-3.71) (-3.09) (-3.08)Bidder Runup 0.072*** 0.071** 0.070**

(2.68) (2.07) (2.01)Bidder Cash Value -0.005*** -0.005*** -0.005***

(-4.62) (-4.42) (-4.57)Relative Size 0.630*** 0.622*** 0.621***

(6.95) (7.44) (7.19)

Industry FE (SIC 1-digit) Yes Yes YesTime FE (5-year intervals) Yes Yes YesNo. of observations 1,121 1,121 1,121Adj. R-Squared 29.3% 29.6% 29.6%

Nontaxable Deal

35  

TABLE 4 The effect of target managers’ capital gains taxes on acquisition premiums

This table presents the results from estimating the effects of target insider ownership and other determinants on acquisition premiums. In the first three columns (fourth column), the sample consists of completed taxable (nontaxable) acquisitions of public targets during 1996 to 2016. Variables are defined in Appendix A. All specifications include controls for (one-digit SIC code) industry effects and five-year acquisition periods. The t-statistics are reported below coefficient estimates in parentheses and are calculated using robust standard errors. *,**,*** indicate statistical significance at the 0.10, 0.05, and 0.01 levels, respectively, using a one-tailed t-test where we have a prediction and a two-tailed t-test otherwise. We also use a one-tailed for the Ayers et al. (2003 and 2004) test variables.

Dependent Variable: Target PremiumSample: Nontaxable DealsInside Own Proxy: Pr. Sign CEO Holdings Top 5 Holdings CEO HoldingsFed CG Rate +,0 0.017*** 0.008 0.004 0.014

(2.60) (1.22) (0.29) (0.89)Fed CG Rate × TI Inst Own -,0 -0.020** -0.013 -0.016 -0.021

(-1.88) (-1.22) (-1.27) (-0.77)TI Inst Own -0.039 -0.042 -0.066 -0.120

(-0.72) (-0.79) (-1.24) (-0.98)Fed CG Rate × Inside Own +,0 0.262*** 0.098** -0.371*

(2.35) (2.01) (-1.53)Inside Own -0.264 -0.034 2.508***

(-0.47) (-0.14) (2.85)Target BTM 0.006 0.001 -0.015 0.006

(0.21) (0.05) (-0.64) (0.14)Target ROA -0.379*** -0.376*** -0.351*** 0.139

(-5.14) (-5.23) (-6.04) (1.60)Target Size -0.026*** -0.029*** -0.024*** -0.033**

(-3.21) (-3.52) (-3.71) (-2.54)Target Leverage 0.016 0.015 0.015 -0.019

(0.94) (0.91) (1.03) (-0.69)Target Current Assets 0.097*** 0.097*** 0.088** 0.023

(3.50) (3.53) (2.56) (0.49)Target NOL 0.057 0.048 0.035 0.148

(1.46) (1.24) (0.78) (1.49)Hostile 0.060 0.061 0.050 0.108

(0.71) (0.70) (0.61) (1.20)Competing Bid -0.019 -0.017 -0.015 0.105

(-0.65) (-0.59) (-0.46) (1.08)Toehold -0.002 -0.001 -0.002 -0.004**

(-1.04) (-0.91) (-1.17) (-2.06)Tender 0.083*** 0.084*** 0.066*** -0.091

(4.07) (4.08) (3.20) (-1.40)

Industry FE (SIC 1-digit) Yes Yes Yes YesTime FE (5-year intervals) Yes Yes Yes YesNo. of observations 1,463 1,463 1,463 564Adj. R-Squared 20.4% 20.9% 22.9% 11.8%

Taxable DealsTarget Premium

36  

TABLE 5 Target managers’ taxes and acquisition outcomes – around changes in tax regimes

This table presents the effects of target insiders’ taxes on acquisition structure (Panel A) and premiums (Panel B), in years adjacent to changes in tax regimes. In the first (second, third) column, Post-Tax Change is an indicator variable equal to one if the deal’s effective date takes place on or after May 7, 1997 (Jan. 1, 2003, Jan. 1, 2013), and zero otherwise. Variables are defined in Appendix A. All specifications include controls for (one-digit SIC code) industry effects. The t-statistics are reported below coefficient estimates in parentheses and are calculated using robust standard errors. *,**,*** indicate statistical significance at the 0.10, 0.05, and 0.01 levels, respectively, using a one-tailed t-test where we have a prediction, and a two-tailed t-test otherwise. We also use a one-tailed for the Ayers et al. (2003 and 2004) test variables. Panel A: Acquisition structure

Dependent Variable:Period: 1/1/1996 - 12/31/2002 5/7/1997 - 12/31/2012 1/1/2003 - 12/31/2016Tax Change: Pr. Sign 1997 Tax Cut 2003 Tax Cut 2013 Tax IncreasePost Tax Change -0.273 -0.048 0.121

(-0.68) (-0.59) (0.80)Post Tax Change × TI Inst Own 0.579 -0.044 -0.332*

(0.60) (-0.22) (-1.32)TI Inst Own -0.994 -0.384** -0.308***

(-1.04) (-1.84) (-3.10)Post Tax Change × Inside Own -,-,+ -3.668** -1.892** 3.322**

(-1.82) (-2.49) (2.13)Inside Own 3.700** 0.454 -1.118**

(1.79) (0.68) (-1.70)Ret 5yr -0.329 -0.048** 0.009

(-1.11) (-2.31) (0.26)Post Tax Change × Ret 5yr 0.252 0.013 -0.074

(0.86) (0.32) (-0.61)Post Tax Change × TI Inst Own × Ret 5yr -0.534 -0.316*** 0.092

(-0.76) (-3.45) (0.45)TI Inst Own × Ret 5yr 0.819 0.275*** -0.066

(1.16) (4.01) (-1.12)Target BTM -0.018 0.051 0.106***

(-0.41) (1.54) (2.64)Target ROA -0.137 -0.251*** -0.355***

(-1.18) (-3.83) (-4.08)Target Size 0.053*** 0.054*** 0.048***

(2.64) (3.98) (3.10)Hostile 0.079 0.073 0.004

(0.60) (1.18) (0.04)Competing Bid -0.347* -0.382*** -0.386**

(-1.71) (-3.32) (-2.48)S&P 500 Index Change 0.078 -0.056 -0.122*

(0.88) (-0.94) (-1.82)Bidder BTM -0.225*** -0.118 0.020

(-3.06) (-1.47) (0.29)Bidder NOL 0.091 0.091** 0.122**

(1.33) (2.04) (2.27)Bidder MTR -0.283 -0.166 0.037

(-1.49) (-1.20) (0.21)Bidder Inst Own -0.155** -0.169*** -0.186***

(-2.36) (-3.27) (-3.75)Bidder Runup 0.051 0.072** 0.047

(1.61) (2.47) (1.01)Bidder Cash Value -0.008*** -0.005*** -0.005***

(-3.93) (-4.62) (-3.89)Relative Size 0.586*** 0.622*** 0.693***

(4.11) (6.39) (5.78)

Industry FE (SIC 1-digit) Yes Yes YesTime FE (5-year intervals) No No NoNo. of observations 517 1,013 604Adj. R-Squared 18.2% 31.1% 38.7%

Nontaxable Deal

37  

TABLE 5 (continued) Panel B: Acquisition premiums

Dependent Variable:Period: 1/1/1996 - 12/31/2002 5/7/1997 - 12/31/2012 1/1/2003 - 12/31/2016Tax Change: Pr. Sign 1997 Tax Cut 2003 Tax Cut 2013 Tax IncreasePost Tax Change 0.102 -0.070 0.057

(0.60) (-1.09) (0.60)Post Tax Change × TI Inst Own 0.133 -0.013 -0.168

(0.31) (-0.29) (-1.18)TI Inst Own -0.171 0.019 0.008

(-0.39) (0.36) (0.15)Post Tax Change × Inside Own -,-,+ -3.987** -0.878* 4.140***

(-1.91) (-1.39) (2.40)Inside Own 3.179* -0.589 -1.371***

(1.54) (-0.99) (-3.05)Target BTM -0.017 0.012 0.019

(-0.60) (0.65) (0.48)Target ROA -0.236** -0.382*** -0.451***

(-2.35) (-7.35) (-4.69)Target Size -0.024 -0.028*** -0.023**

(-1.33) (-2.64) (-2.49)Target Leverage -0.011 0.014 0.021

(-0.30) (0.54) (1.00)Target Current Assets 0.140*** 0.092*** 0.077**

(3.57) (2.61) (2.57)Target NOL -0.036 0.027 0.058

(-0.42) (0.51) (1.15)Hostile 0.198 0.055 -0.120

(1.61) (0.55) (-1.47)Competing Bid -0.103* -0.031 0.009

(-1.75) (-0.88) (0.21)Toehold -0.002 -0.002 -0.000

(-0.84) (-0.57) (-0.10)Tender 0.075* 0.086*** 0.093***

(1.95) (3.46) (3.44)

Industry FE (SIC 1-digit) Yes Yes YesTime FE (5-year intervals) No No NoNo. of observations 470 1,330 993Adj. R-Squared 13.3% 21.3% 23.0%

Target Premium

38  

TABLE 6 The effect of target managers’ state gains taxes on acquisition outcomes

This table presents the effects of target managers’ state long-term gain taxes on acquisition structure (Panel A) and premiums (Panel B). Variables are defined in Appendix A. The t-statistics are reported below coefficient estimates in parentheses and are calculated based on standard errors clustered at the state level. *,**,*** indicate statistical significance at the 0.10, 0.05, and 0.01 levels, respectively, using a one-tailed t-test where we have a prediction and a two-tailed t-test otherwise. Panel A: Acquisition structure

Dependent Variable: Pr. SignState CG Rate -0.006 -0.004 -0.018

(-0.60) (-0.39) (-0.84)State CG Rate × TI Inst Own 0.012 0.008 0.001

(0.83) (0.51) (0.10)TI Inst Own -0.357*** -0.350*** -0.356***

(-5.49) (-5.16) (-4.86)State CG Rate × Inside Own + 0.143** 0.144** 0.154**

(2.30) (1.89) (2.33)Inside Own -0.172 -0.266 -0.121

(-0.52) (-0.73) (-0.33)Ret 5yr -0.013 -0.005 -0.003

(-0.63) (-0.21) (-0.12)State CG Rate × Ret 5yr -0.007 -0.006 -0.007

(-1.38) (-1.26) (-1.30)State CG Rate × TI Inst Own × Ret 5yr 0.012 0.013 0.012

(1.23) (1.25) (1.23)TI Inst Own × Ret 5yr 0.031 0.026 0.016

(0.80) (0.64) (0.41)Target BTM 0.071** 0.056 0.061

(2.23) (1.56) (1.64)Target ROA -0.252*** -0.244*** -0.180***

(-5.89) (-5.21) (-3.96)Target Size 0.052*** 0.052*** 0.052***

(4.51) (4.13) (3.85)Hostile -0.298** -0.281* -0.318*

(-1.98) (-1.79) (-1.90)Competing Bid -0.070 -0.069 -0.091*

(-1.41) (-1.40) (-1.71)S&P 500 Index Change 0.029 0.058 0.070

(0.39) (0.63) (0.71)Bidder BTM -0.122** -0.128** -0.100*

(-2.26) (-2.42) (-1.70)Bidder NOL 0.134*** 0.121*** 0.109***

(2.97) (2.75) (2.79)Bidder MTR -0.035 -0.081 -0.048

(-0.23) (-0.51) (-0.36)Bidder Inst Own -0.146*** -0.153*** -0.156***

(-3.01) (-3.34) (-3.61)Bidder Runup 0.086*** 0.082*** 0.088***

(2.81) (2.68) (2.84)Bidder Cash Value -0.005*** -0.005*** -0.005***

(-5.88) (-5.77) (-5.75)Relative Size 0.646*** 0.672*** 0.676***

(5.85) (6.60) (6.45)

Industry FE (SIC 1-digit) Yes Yes YesTime FE (5-year intervals) Yes No NoYear FE No Yes YesState FE No No YesS.E. clustered by state Yes Yes YesNo. of observations 1,121 1,121 1,121Adj. R-Squared 27.3% 28.3% 29.7%

Nontaxable Deal

39  

TABLE 6 (continued) Panel B: Acquisition premiums

Dependent Variable: Pr. SignState CG Rate -0.001 0.000 0.033*

(-0.11) (0.03) (1.54)State CG Rate × TI Inst Own 0.004 0.003 0.002

(0.21) (0.17) (0.11)TI Inst Own 0.000 -0.006 -0.004

(0.00) (-0.11) (-0.06)State CG Rate × Inside Own + 0.151** 0.141** 0.152**

(2.15) (2.02) (2.22)Inside Own -1.306*** -1.196*** -1.229***

(-3.80) (-3.75) (-3.28)Target BTM 0.022 0.002 0.004

(0.71) (0.07) (0.14)Target ROA -0.489*** -0.464*** -0.457***

(-8.22) (-7.81) (-7.00)Target Size -0.033** -0.033*** -0.032**

(-2.27) (-2.69) (-2.35)Target Leverage 0.009 0.011 0.014

(0.29) (0.40) (0.49)Target Current Assets 0.099*** 0.086*** 0.092***

(2.74) (2.96) (3.10)Target NOL 0.106* 0.088* 0.078

(1.78) (1.72) (1.43)Hostile 0.064 0.082 0.083

(0.46) (0.66) (0.62)Competing Bid -0.031 -0.034 -0.046

(-0.74) (-0.88) (-1.01)Toehold -0.000 -0.001 -0.000

(-0.28) (-0.48) (-0.21)Tender 0.090*** 0.067** 0.079***

(3.51) (2.19) (3.09)

Industry FE (SIC 1-digit) Yes Yes YesTime FE (5-year intervals) Yes No NoYear FE No Yes YesState FE No No YesS.E. clustered by state Yes Yes YesNo. of observations 1,463 1,463 1,463Adj. R-Squared 22.5% 24.8% 24.0%

Target Premium

40  

TABLE 7 Target managers’ taxes and acquisition outcomes for public and private acquirers

This table presents the effects of target managers’ taxes on acquisition structure (Panel A) and premiums (Panel B), for public and private acquirers. Variables are defined in Appendix A. The t-statistics are reported below coefficient estimates in parentheses and are calculated using robust standard errors. *,**,*** indicate statistical significance at the 0.10, 0.05, and 0.01 levels, respectively, using a one-tailed t-test where we have a prediction and a two-tailed t-test otherwise. Panel A: Acquisition structure

Dependent Variable:Sample: Pr. Sign Public Acquirers Private AcquirersFed CG Rate 0.008 0.011

(0.51) (1.01)Fed CG Rate × TI Inst Own -0.028 -0.014

(-1.07) (-0.75)TI Inst Own -0.478*** -0.049

(-3.78) (-0.49)Fed CG Rate × Inside Own +,0 0.290*** 0.079

(3.22) (0.70)Inside Own -0.161 0.659*

(-0.32) (1.49)Ret 5yr -0.034 0.024

(-0.95) (0.51)Fed CG Rate × Ret 5yr 0.002 0.002

(0.21) (0.24)Fed CG Rate × TI Inst Own × Ret 5yr 0.036 0.014

(1.62) (1.09)TI Inst Own × Ret 5yr 0.164* 0.057

(1.74) (0.82)Target BTM 0.044 -0.016

(1.24) (-1.17)Target ROA -0.217*** -0.190***

(-4.10) (-2.72)Target Size 0.074*** 0.008

(5.18) (1.38)Hostile -0.252*** -0.120**

(-3.04) (-2.20)Competing Bid -0.066 -0.053**

(-1.07) (-2.15)S&P 500 Index Change 0.026 -0.077*

(0.36) (-1.89)

Industry FE (SIC 1-digit) Yes YesTime FE (5-year intervals) Yes YesNo. of observations 1,121 906Adj. R-Squared 20.1% 12.0%

Nontaxable Deal

41  

TABLE 7 (continued) Panel B: Acquisition premiums

Dependent Variable:Sample: Pr. Sign Public Acquirers Private AcquirersFed CG Rate 0.007 0.006

(0.56) (0.64)Fed CG Rate × TI Inst Own -0.005 -0.016

(-0.31) (-1.11)TI Inst Own -0.030 -0.089*

(-0.37) (-1.30)Fed CG Rate × Inside Own 0,+ -0.077 0.456***

(-0.43) (3.39)Inside Own -0.802 0.109

(-0.92) (0.19)Target BTM 0.061 -0.030

(1.19) (-0.81)Target ROA -0.368*** -0.386***

(-3.62) (-3.81)Target Size -0.018 -0.035***

(-1.28) (-3.24)Target Leverage 0.019 0.019

(0.58) (1.12)Target Current Assets 0.159*** 0.069**

(3.54) (2.46)Target NOL -0.009 0.069

(-0.16) (1.44)Hostile -0.120 0.216*

(-0.86) (1.77)Competing Bid 0.049 -0.044

(0.76) (-1.20)Toehold -0.004 0.000

(-1.05) (0.14)Tender 0.060* 0.097***

(1.91) (3.18)

Industry FE (SIC 1-digit) Yes YesTime FE (5-year intervals) Yes YesNo. of observations 629 834Adj. R-Squared 20.0% 23.8%

Target Premium