The Role of Tax Attributes in Corporate Acquisitions.

Numerous studies of the wealth effects of acquisition announcements find that target firms experience large, positive abnormal stock price changes during this period; acquiring firms also appear to benefit although the gains are much smaller in magnitude. Knowledge about the source of these gains is limited. Several studies have examined whether tax advantages that accrue to acquiring firms through acquisition contribute to the gains. The evidence to date on whether tax variables matter is contradictory. This study further explores the relationship between acquisition period gains and tax variables, resolving some of the questions raised by previous findings. To do this, the relevant tax attributes associated with taxable and tax-free acquisitions are identified. Specifically, the step-up in the target firm's asset basis, depreciation recapture and the capital gains liability of the target firm's shareholders are examined in taxable acquisitions. Net operating loss carryforwards and unused investment and foreign tax credits are the tax attributes examined in tax-free acquisitions. Reasons why these attributes may or may not prove to be a source of the gains are discussed. Descriptive information is presented documenting the size and prevalence of the attributes. Finally, empirical analyses are performed to determine if the announcement returns to target and /or acquiring firms are related to the tax variables. The results are as follows. First, the tax status of acquisition (taxable or tax-free) rather than the form of offer (tender offer or merger proposal) appears to explain the differential wealth effects documented in previous studies of acquisition announcements. Second, announcement period returns for firms having relatively large attributes are higher on average than are the returns of a control group of firms with the same acquisition tax status but with relatively small tax attributes. Finally, the cross-sectional analyses reveal that the tax attributes in taxable acquisitions are related to the announcement period returns while those in tax-free acquisitions are not.Ph.D.AccountingUniversity of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/161662/1/8801329.pd

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The paper studies the manner by which earnings expectations are met, measures the rewards to meeting or beating earnings expectations (MBE) formed just prior to the release of quarterly earnings, and tests alternative explanations for this reward. The evidence supports the claims that the MBE phenomenon has become more widespread in recent years and that the pattern by which MBE is obtained is consistent with both earnings management and expectation management. More importantly, the evidence shows that after controlling for the overall earnings performance in the quarter, firms that manage to meet or beat their earnings expectations enjoy an average quarterly return that is higher by almost 3% than their peers that fail to do so. While investors appear to discount MBE cases that are likely to result from expectation or earnings management, the premium in these cases is still significant. Finally, the results are consistent with an economic explanation for the premium placed on earnings surprises, namely that MBE are informative of the firm’s future performance