Domestic Taxes and Inbound Acquisitions *

Abstract U.S. corporations face higher tax burdens than those in many other countries, potentially influencing merger and acquisition activity. A theoretical model of this process yields two testable implications: that, relative to high-tax domestic bidders, low-tax foreign bidders will specialize in both high profitability target firms and those with few tax deductions. I find support for both effects in the U.S. acquisition market using cross-sectional variation in target profitability and industry-level variation in deductions from bonus depreciation tax reform. Counterfactual simulations show that this reform induced a large drop in foreign acquisitions and a significant loss of aggregate wealth. * This paper previously circulated with the title "The Effects of Taxes on the Market for Corporate Control". I would like to thank Michael Smart, Robert McMillan, Laurence Booth and Alex Edwards for their guidance and support throughout this project. Thanks also t