Pricing target NOLs in mergers and acquisitions from the participating firms' perspective

While prior research has extensively examined the market response to target net operating loss carryforwards (NOLs) in mergers and acquisitions (M&A) announcements, the question of whether target NOLs are priced by the participating firms during the price negotiation process has not been explicitly addressed. Answers to this question could provide direct measures to assist firms in pricing target NOLs in M&As. Our results show that the participating firms price target NOLs based on how long it will take the acquirer to use the acquired NOL in both nontaxable and taxable acquisitions under the Tax Reform Act of 1986. Also, we find a significant difference in the market pricing and the participant pricing of target short-lived NOLs before, and continuing well after, the announcement date. Our findings suggest that the importance of the differences between the market and the participating firms perspectives should be considered when conducting future research in this area.     

LEASING AND THE US 1986 TAX REFORM ACT

The US 1986 Tax Reform Act (TRA) contains several tax provisions affecting many areas of corporate finance including lease financing. One of the more important provisions is the Alternative Minimum Tax (AMT) which determines an alternative in addition to the usual tax computation, and consequently results in a new lessee-lessor tax-asymmetry. To investigate the overall impact on the net advantage of leasing (NAL) of both the AMT and the other relevant provisions of the TRA, a leasing model is developed which incorporates these tax provisions. In the context of this leasing model, the following results are derived. When the AMT provision does not apply, the Tax Reform Act (TRA) reduces substantially the net advantage of leasing (NAL) over buying. In contrast, the effect of the AMT symmetry is positive. As a result, the combined effect of the AMT and the other changes in the TRA on the NAL is negligible for property class of assets of the more common length of time (about ten years), but becomes negative for real-property type of assets.     

THE MARKET REACTION TO THE 1986 TAX OVERHAUL: A STUDY OF THE CAPITAL GAIN TAX CHANGE

The Tax Reform Act of 1986 (TRA) eliminated the favorable tax treatment on long-term capital gains in the US. Using a standard event study… CONTENTS AND ABSTRACTS 111 methodology, this paper examines daily stock return reactions to the tax overhaul. The results show that high dividend yield stocks earned a significant positive abnormal return and low yield stocks a significant negative return during the legislation period. This finding is consistent with the notion that the TRA made the market valuation of stocks shift in favor of high yield stocks.     

Analysts’ earnings forecasting behavior surrounding uncertain regulatory events: evidence from the Tax Reform Act of 1986

This study examines analysts’ forecasting behaviour in the presence of significant tax policy uncertainty. The Tax Reform Act of 1986 (TRA86) was preceded by a lengthy debate, allowing us to investigate how tax policy uncertainty evolves over time. Our results are generally consistent with the intuition that uncertainty precedes the enactment of a proposed tax law while complexity manifests afterwards. Using the repeal of the investment tax credit to identify highly impacted firms, we find that the onset of disagreement among analysts during the debate occurred sooner for highly impacted firms than other firms. We also find that disagreement among analysts was concentrated among highly impacted firms before and after enactment. Given that our sample period precedes Regulation Fair Disclosure, our evidence suggests that analysts relied on private information from management to resolve the uncertainty associated with TRA86 but only for highly impacted firms.     

Taxes and the acquisition of depreciable assets: The Tax Reform Act of 1986 and the alternative minimum tax

Analysis of firm investment behavior during 1982–1993 shows that the Tax Reform Act of 1986 (TRA 86) Public Law No. 99-514 substantially affects both purchases and leases of depreciable assets. The changes in the regular corporate income tax rules are shown to lower asset acquisition. The effect of the alternative minimum tax (AMT) is found to vary with the debt share in firms’ capital structure and with the frequency of AMT exposure during the life of the assets acquired. On average, TRA86 depresses asset purchases less for firms that are subject to the AMT: AMT somewhat mitigates the negative effects of the regular tax rules.     

Examining the Impact of the 1986 Tax Reform Act on Corporate Dividend Policy: A New Methodology

This article introduces a new methodology to investigate the effects of the 1986 Tax Reform Act (TRA) on corporate dividend policy. The methodology employs a modified version of Rozeff's (1982) model to control for the potential effect of underlying influential variables. The empirical results show there is no widespread reaction to the 1986 TRA passage on the aggregate level of dividends and only modest support for an industry-related dividend effect. We also find that firm size does not play a significant role in dividend policy reaction to the 1986 TRA.     

Mergers in India. A Response to Regulatory Shocks

Recent empirical research shows that industry and regulatory shocks play a key role in determining merger activity in developed countries. We use this framework to analyze merger activity in India, using a comprehensive database spanning a thirty-year period, from 1973-74 to 2002-3. At the industry level, we identify clustering of merger activity in India, indicating that mergers may be a response to industry and regulatory shocks. At the firm level, the 1991 amendments to the Monopolies and Restrictive Trade Practices (MRTP) Act, which removed premerger scrutiny, are found to have a positive and significant effect on merger behavior of firms that had been under its purview. After the 1991 amendments, firms underwent mergers that would have been scrutinized by the MRTP Act otherwise. These mergers were undertaken for expansionary reasons.     

EFFECT OF MERGERS ON THE SHARE PRICE MOVEMENT OF THE ACQUIRING FIRMS: A UK STUDY

The profitability of mergers in Britain has not received the same attention as in the USA. This study examines mergers for the UK industrial sector as a whole for a period (1974–76) when merger activity was relatively slack. A standard methodology is used, but the size effects and the activeness of acquirors as well as the financing of the acquisition are examined. The conclusions contradict to some extent those found by other researchers in that the evidence was inconsis- tent with the Efficient Markets Hypothesis. The effect of taking firm size into account was found to reduce the standard deviations of the sample and it would appear that the cash mergers were viewed as less desirable by the market com- pared to equity exchange. For the separation of merger activehon active firms it was found that there was less dispersion of the residuals for non-merger active firms.     

Tax Policy and Shareholder Wealth: Some Evidence from the Tax Reform Act of 1986

This paper presents additional evidence regarding the stock market reaction to the Tax Reform Act (TRA) of 1986. A prediction model of the change in the profitability index for thirty-three industry groups as a result of the TRA is developed. This prediction model is then tested by examining abnormal industry returns surrounding the announcement of the TRA. The authors find that the distribution of the abnormal returns is related to the distribution of the predicted changes in industry equity investment returns, which suggests that the stock market was efficient in the pricing of news related to the TRA of 1986.     

THE PERFORMANCE OF CORPORATE MERGERS IN JAPAN

This paper presents an objective and systematic analysis of the performance of corporate mergers in Japan. Two types of tests are provided. One is to compare fmancial ratios of merging firms before and after the merger. Negative effects of mergers are verified. The other is to compare the financial performances of merging and nonmerging firms before and after the merger in the same industry. No clear distinction is obtained between them. General comparisons between merging and nonmerging fms indicate negative effects of mergers.     

A welfare evaluation of the 1986 tax reform for married couples in the United States

This paper evaluates the welfare effects of the 1986 Tax Reform Act (TRA86). We rely on different welfare metrics, which fully retain preference heterogeneity and are based on different ethical priors. We estimate utility functions with preference heterogeneity on the basis of structural models of family labor supply. Then, using these estimated preferences, we compute and compare different well-being rankings corresponding to different ways of measuring well-being. Finally, we identify the losers and the winners of TRA86, in absolute and relative terms, for each of the welfare metrics.     

Taxes and capital structure: evidence from firms' response to the Tax Reform Act of 1986

While the theoretical relation between taxes and capital structurehas been extensively analyzed, the empirical evidence on thisissue has thus far been inconclusive. One of the main difficultiesconfronting previous empirical studies of the cross-sectionalrelationship between taxes and leverage was the control of interveningvariables. The Tax Reform Act of 1986 (TRA), which drasticallychanged the tax regime, provides a unique opportunity to assessthe interaction between taxes and leverage decisions in a controlledenvironment. We test the relationship between leverage and certaintax-related variables for a large sample of companies in theyears surrounding the enactment of the TRA. The results supportthe tax-based theories of capital structure. The findings indicatethat there exists a substitution effect between debt and nondebttax shields, and that both corporate and personal tax ratesaffect leverage decisions.     

Real Estate Mergers: Corporate Control &; Shareholder Wealth

This study contributes new evidence to distinguish why mergers occur in the real estate industry by quantifying the combined firm return for nearly three decades of real estate mergers. As a measure of the overall change in shareholder wealth created by a merger, the combined firm return plays a key role in differentiating competing merger theories and is quantified for the real estate industry for the first time. Findings from this study are consistent with the notion that real estate mergers occur because firms with superior management acquire other firms that possess unexploited opportunities to cut costs and increase earnings (the inefficient management hypothesis). Furthermore, the results indicate that real estate mergers generally create wealth, as shareholders at best realize modest gains and at worst break even.     

Tax and Regulatory Motivations for Issuing Non-voting, Non-convertible Preferred Stock

This paper extends prior studies that attempt to explain the existence of unique securities, particularly Engel, Erickson, and Maydew [1999], by investigating why firms issue non-voting, non-convertible preferred stock (PS) instead of other securities. We find that the choice of PS is influenced by tax and regulatory changes imposed by the Tax Reform Act of 1986 (TRA86) and the 1989 Basle Banking Accord as well as various firm specific incentives. We find that industrials issue PS to preserve tax attributes by avoiding an ownership change and to maximize foreign tax credit utilization. In addition, we find that the regulatory requirements of the Basle Accord influence the choice by banks to issue PS. Finally, we show that although firms could have issued alternative securities that would have allowed them to achieve the same tax or regulatory goals, firm specific factors limit their ability to do so. For example, firms can also avoid triggering an ownership change by issuing straight debt, however, financial distress considerations may constrain their ability to issue additional debt. Therefore, we demonstrate that the final choice of PS is influenced by a combination of tax, regulatory, and firm specific incentives.     

THE EFFECT OF THE 1986 TAX REFORM ACT ON EX-DIVIDEND DAY RETURN BEHAVIOR

In this study I examine whether the Tax Reform Act of 1986 has an effect on ex-date stock return behavior. Results indicate that the tax reform has a significant effect on ex-date returns for NASDAQ stocks, but not for NYSE/AMEX stocks. Further analysis suggests that the ex-date returns on NASDAQ stocks are primarily determined by the tax premium. However, the ex-date returns on NYSE/AMEX stocks are more influenced by short-term trading.     

Dividend taxation and corporate investment: a comparative study between the classical system and imputation system of dividend taxation in the United States and Australia

In recent times a number of countries have initiated some important tax reforms to eliminate the distortions of double taxation. In this context, Australia adopted a dividend imputation system in 1987, while the US employed the 1986 Tax Reform Act (TRA). The analysis in this paper examines the effects on the level of corporate capital investment, on proxies for corporate tax rates, financial leverage, liquidity, capital intensity and firm size after controlling for the tax reforms. The empirical results provide evidence that: (1) dividend imputation as introduced in Australia is an effective way to reduce the distortions caused by the traditional system of taxation. (2) Compared with the TRA, dividend imputation has been better able to positively stimulate corporate capital investment. (3) TRA effect on corporate investment is more pronounced in the US for firms having a net operating loss. (4) Individual tax rates play a role in corporate investment decisions in both the US and Australia.

EXAMINING MERGER SYNERGY WITH THE CAPITAL ASSET PRICING MODEL

This paper analyzes the impact of mergers on the alphas and betas of actual merged firms compared to those of the homemade mergers an investor could have created by buying proportional shares of the two firms. The results provide some evidence of merger synergy. Where alpha and beta shifts were observed, the evidence did not indicate that either the relative size of target firms or concurrent capital structure changes were related to these shifts as current theory suggests. There is weak evidence that nonconglomerate mergers were more frequently synergistic.     

AN EXAMINATION OF MERGER SYNERGISM

The empirical research discussed in this paper measures the synergistic effects of mergers on the stockholders of the acquiring and acquired firms. Synergism is defined as the incremental wealth to the shareholders of both merging firms due to the merger—net of any potential gains achievable through investors' personal diversification over the common stocks of the merging firms. Three types of mergers are identified and studied—nonconglomerate, conglomerate with increasing financial leverage, and conglomerate with decreasing financial leverage. The results indicate that these types of mergers are affected differently by the combination. Moreover, the evidence suggests operational and/or financial synergism.     

Understanding partial mergers in Japan

Since the late 1990s, Japan has witnessed a substantial increase of partial mergers where two or more firms spin off whole operations in the same business and combine them into a joint venture (JV). This paper provides the first academic evidence on this phenomenon. I find that partial mergers normally occur as a response to negative economic shocks by firms that are larger and more diversified than firms in total mergers. An event study identifies positive and significant returns to partial merger announcements. Unlike total mergers whose value accrues mostly to the shareholders of small (acquired) firms, large and small firms in partial mergers receive comparable returns, which are particularly large to firms forming an equally owned JV. This study also finds that partial mergers are often ex post transformed, with equity sale between partners being the main source of change.     

DIRECT EVIDENCE ON THE MARKET‐DRIVEN ACQUISITION THEORY

We provide direct empirical evidence that share overvaluation is an important motive for firms to make stock acquisitions. We find that more overvalued firms are more likely to acquire with stock, and acquirers are more overvalued in successful stock mergers than in withdrawn mergers. Acquirers' overvaluation, on average, exceeds the targets' premium‐adjusted overvaluation. Shareholders of stock acquirers, whose overvaluation is greater than their targets' premium‐adjusted overvaluation, realize sustained wealth gains from one day before the merger announcement up to three years after the merger completion, as compared with a matching sample of similarly overvalued but nonacquiring firms.