CORPORATE TAX AVOIDANCE AND PROFITABILITY FOLLOWED BY MERGERS AND ACQUISITIONS

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Abstract

This paper aims to understand the change in corporate tax avoidance of acquirer firms following M&A deals. Several M&A features were tested in a sample which covers 391 European deals announced between 2005 and 2014. Overall, results suggest that there is no evidence of changes in acquirer’s ETR following M&As. However, evidence was found of a decrease in acquirer’s ETR of about 6.7% when the target firms report negative pre-tax income before the deal, and of 2.6% for domestic M&A. The decrease is increased to 7.9% if these characteristics are not mutually exclusive. Furthermore, it was found that acquirer’s ETR decreases with profitability, which is more pronounced in the presence of M&A deals. The findings support the longstanding view that taxation may not trigger M&As, although significant tax savings appear to occur for certain M&A characteristics.

Keywords: Mergers and Acquisitions, Tax Avoidance, Cross-Border

Acknowledgements: the authors wish to thank Joaquim Miranda Sarmento, Clara Raposo, and participants at the International Conference “Corporate Governance and Firm Performance” 2017 for valuable comments and suggestions. We also gratefully acknowledge financial support from FCT – Fundação para a Ciência e Tecnologia (Portugal), national funding through a research grant (UID/SOC/04521/2013)

Received: 23.12.2017
Accepted: 02.02.2018

JEL Classification: G34, H26, F20

How to cite this paper: Duarte, D., & Barros, V. (2018). Corporate tax avoidance and profitability followed by mergers and acquisitions. Corporate Ownership & Control, 15(2-1), 148-160. https://doi.org/10.22495/cocv15i2c1p2