An Empirical Study of the Consequences of U.S. Tax Rules for International Acquisitions by U.S. Firms

Authors

  • GIL B. MANZON JR.,

  • DAVID J. SHARP,

  • NICKOLAOS G. TRAVLOS

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    • Manzon is from Boston College, Sharp is from the University of Western Ontario, and Travlos is from the University of Piraeus, Greece, Boston College, and the Athens Laboratory of Business Administration, Greece. Helpful comments were received from Jeff Cohen, Elaine Harwood, Peter Kugel, Robyn McLaughlin, Rick Robertson, Robert Taggart, participants at the Boston College Works-in-Progress seminar, the Co-Editor David Mayers, and an anonymous referee. We are thankful for the research assistance of Julie Benito, Anindya Dutta, Jim Jordan, Mark Potter, and Mike Prus. Earlier versions of this article were presented at the 1993 American Accounting Association annual meeting in San Francisco and the 1993 Financial Management Association annual meeting in Toronto.

ABSTRACT

This article examines the effect of tax factors on the equity values of U.S. multinational corporations making foreign acquisitions. Abnormal stock returns are found to be related to a tax variable that captures differences in the international tax status of acquiring firms but not related to a naive tax variable that captures differences between tax rates in target countries and the United States. Our evidence suggests that aggregate intercountry differentials in after-tax returns are competed away, while firm-specific, tax-related advantages (or disadvantages) are reflected in abnormal returns around the announcement date of the acquisition.

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