Shareholder Taxes in Acquisition Premiums: The Effect of Capital Gains Taxation


  • Benjamin C. Ayers,

  • Craig E. Lefanowicz,

  • John R. Robinson

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    • Ayers is from The University of Georgia, Lefanowicz is from Indiana University-Indiana-polis, and Robinson is from The University of Texas at Austin. Ayers gratefully acknowledges the support of the Terry College of Business and the Sanford-Terry Research Grant program. Lefanowicz gratefully acknowledges the support of the Kelley School of Business. Robinson gratefully acknowledges the support of The Red McCombs School of Business. The authors also appreciate the constructive comments of Sanjay Gupta, Charlie Hadlock, Steve Kachel-meier, John Martin, Jim Seida, and seminar participants at Arizona State University, Baylor University, The University of Chicago, The University of Georgia, Indiana University-Indiana-polis, The University of Tennessee, and The University of Texas at Austin. Any errors are our own.


We exploit cross-temporal differences in capital gains tax rates to test whether shareholder-level capital gains taxes are associated with higher acquisition premiums for taxable acquisitions. We model acquisition premiums as a function of proxies for the capital gains taxes of target shareholders, taxability of the acquisition, and tax status of the price-setting shareholder as represented by the level of target institutional ownership. Consistent with a lock-in effect for acquisition premiums, results suggest a unique positive association between shareholder capital gains taxes for individual investors and acquisition premiums for taxable acquisitions, which is mitigated by target institutional ownership.