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Abstract

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.