Corporate tax avoidance and profitability followed by mergers and acquisitions

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