Abstract:

The major concern in a mergers and acquisitions (M&A) transaction is how to determine the economic benefits and burdens and allocate them among the participating firms. Part of this concern can be described as the question of how the participating firms ascertain and price the potential tax benefits of the target's tax attributes.

Different from prior research, which focuses on the reaction of the market, this study emphasizes the viewpoint of the participating firms in pricing the target firms' deferred taxes when determining the acquisition price. The results indicate that the participating firms assign value to the target firms' deferred taxes. Further decomposing the deferred taxes into several components shows that net deferred tax assets are given value regardless of the taxability of acquisitions. However, deferred tax liabilities are assigned negative value in taxable transactions but are ignored in non-taxable transactions. Also, deferred tax assets from all others (AODTA) are priced by the participating firms, but deferred tax assets from other loss carryforwards (OLC) and tax credit carryforwards (TCC) are not. Moreover, deferred tax assets from NOL carryforwards (NOL) are priced only when the ratio of target's book value of equity to market value of equity is high. This finding is different from prior research which suggests NOL carryforwards and tax credit carryforwards are priced by the market. This difference implies that the market and the participating firms have a different point of view on the value of deferred tax assets from NOL carryforwards.