THE EFFECT OF A TAX LAW CHANGE ON THE STRUCTURE OF CORPORATE ACQUISITIONS (MERGERS)

This study investigates the influence of taxes on the structure of corporate acquisition decisions by examining transactions for an association between the enactment of the Omnibus Budget Reconciliation Act of 1993 (OBRA'93) and the tax structure decision of mergers and acquisitions. Using data from July 1, 1991 through December 31, 1994, this study provides clear evidence of a relationship between a tax law change and the structure of corporate acquisition decisions. In particular, a positive relation exists between the tax structure of acquisitions and the change in the deductibility of goodwill from OBRA'93. The results of this study also identify the potential goodwill generated from the transaction to be significant in the tax status decision. The study finds no evidence that the proportion of goodwill to other existing target intangibles is associated with tax structure. Similarly, the predicted positive relation between the acquiring firms' marginal tax rate and tax structure is not supported by the analysis.; The results of this study do not show a significant relation between the tax status decision and the accounting treatment choice in structuring an acquisition. In fact, the findings show that the model used most often to explain the accounting treatment choice (the income maximization model) does a poor job of explaining the purchase/pooling decision. This result is inconsistent with prior literature: yet, no other model has been developed to adequately explain the accounting treatment choice.; This study is one of the first to investigate the decision to acquire a target through an asset versus a stock purchase. The results provide evidence of a relation between certain tax variables (step up in asset basis and target NOL carryovers) and the type of acquisition. Additionally, this study provides strong evidence that the existence of target environmental liabilities increases the probability that an acquisition will be an asset transaction.; The findings of this study are important in that they provide new evidence of the impact a change in the tax law has on the structure of corporate acquisitions, whether or not it is intended. Evidence of a significant positive relationship between the presence of target environmental liabilities and the probability of a taxable asset acquisition may suggest that the avoidance of acquiring potential liabilities may override any tax benefits to be derived from the acquisition.