An analysis of intertemporal effects of United States tax reform and exchange-rate movements on domestic and foreign acquisition activity in the U.S

During the 1980s the United States (U.S.) witnessed two distinct patterns of merger and acquisition activity. The early 1980s witnessed a wave of domestic mergers and acquisitions in the U.S., whereas the mid to late 1980s saw a surge of foreign acquisitions and investments in the U.S. Two arguments have been advanced to explain this phenomenon. The first argument by Scholes and Wolfson (1990) attributes this pattern to changes in U.S. tax laws. The second argument by Froot and Stein (1991) links the observed pattern of foreign acquisition activity to movements in the dollar exchange rate.; This study empirically examines the Scholes and Wolfson tax argument in conjunction with the Froot and Stein exchange-rate argument regarding the effects of U.S. tax reform and exchange-rate movements on target shareholder returns associated with domestic and foreign acquisition announcements. Event study methodology is used to measure cumulative abnormal returns accruing to shareholders around the announcement date. Cross-sectional regression analysis is employed to assess the differential impact of bidder nationality, U.S. tax reform, and exchange-rate movements on U.S. target shareholder returns.; This study finds partial support for the tax argument. Returns of domestic acquisitions remained constant during the ERTA years and increased during the period following enactment of TRA86. These results are opposite expectations given that domestic returns were expected to increase during the ERTA years and decrease following passage of TRA86. Returns of foreign acquisitions, however, vary exactly as predicted. Returns decrease significantly during the ERTA years and increase significantly following enactment of TRA86.; The results regarding the exchange-rate variable are inconclusive. When the regression includes only the exchange-rate variable, the coefficient is significant at the one percent level. However, when the exchange-rate variable is included with the tax variables, no significance is found for any variable.