Method of payment and the success of mergers and acquisitions: the role of taxes

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Mergers and acquisitions activity has increased drastically during the last decades. Nowadays, M&A is a multi-trillion dollar industry, accounting for the biggest part of FDI. However, many M&A’s turn out to be unsuccessful, destroying firm value and costing billions. Prior literature comes up with different results on the success of M&A’s and what causes this success. This study contributes to the discussion on the effect of the method of payment on the success of M&A’s, by looking at the abnormal returns of the target’s stock after the announcement date. In addition, the role of capital gains taxes on this relation is tested. An event study is carried out using data of 244 M&A deals with EU-based target firms during the timeframe 2010-2019. The results show significant positive cumulative average abnormal returns of 20.04% during the -1/+30 event window. Moreover, the results indicate higher abnormal returns for M&A’s when paid with cash or a mix between cash and shares, relatively to M&A’s paid for by shares. Finally, the results show the capital gains tax rates do not have a significant interaction effect on the role of the method of payment on the success of M&A’s. Keywords: Mergers and acquisitions, method of payment, abnormal returns, capital gains, taxation
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