Corporate taxes and financing methods for taxable acquisitions

Dan S Dhaliwal, Kaye J. Newberry, Connie D. Weaver

Research output: Contribution to journalArticle

8 Citations (Scopus)

Abstract

We examine the influence of corporate taxes on U.S. firms' financing methods for taxable acquisitions of 100 percent of a target corporation's stock. We conduct tests of acquirer firms' use of debt or internal funds as the funding source for these acquisitions over the period 1987-97. Our results provide the first empirical evidence that U.S. firms' use of debt to fund acquisitions significantly declines as foreign tax credit limitations reduce the marginal tax benefits received from borrowing. This finding is consistent with earlier speculation that U.S. foreign tax credit provisions could materially affect the capital costs of U.S. companies in debt-financed acquisitions. We also find that these firms are generally high-tax-rate corporations whose financing choices are not significantly influenced by whether they acquire target-firm tax loss carryovers. Our findings contribute to the accounting literature on the influence of taxes on the structure and financing of corporate acquisitions.

Original languageEnglish (US)
Pages (from-to)1-30
Number of pages30
JournalContemporary Accounting Research
Volume22
Issue number1
DOIs
StatePublished - Mar 2005

Fingerprint

Corporate tax
Financing
Tax
Debt
Foreign tax credit
Corporate acquisitions
Cost of capital
Borrowing
Speculation
Empirical evidence
Tax rate
Financing choices
Funding

Keywords

  • Acquisitions
  • Corporate taxes
  • Financing choice
  • Foreign tax credit

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

Corporate taxes and financing methods for taxable acquisitions. / Dhaliwal, Dan S; Newberry, Kaye J.; Weaver, Connie D.

In: Contemporary Accounting Research, Vol. 22, No. 1, 03.2005, p. 1-30.

Research output: Contribution to journalArticle

Dhaliwal, Dan S ; Newberry, Kaye J. ; Weaver, Connie D. / Corporate taxes and financing methods for taxable acquisitions. In: Contemporary Accounting Research. 2005 ; Vol. 22, No. 1. pp. 1-30.
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