Shiing-Wu Wang

This study examines the effect of the tax preferential treatment of foreign derived intangible income established by the 2018 Tax Cuts and Jobs Act on the location of intangibles for U.S. corporations. Data from a sample of twenty U.S. corporations suggests that there is a significant increase in foreign derived intangible income for the U.S. corporations after 2017.

The Effect of Acquirer Net Operating Losses on Acquisition Premiums and Acquirer Abnormal Returns

Merle Erickson, University of Chicago, Karen Ton, Emory University, Shiingwu Wang, University of Southern California

This study examines whether acquirer NOL-related tax benefits generated in an acquisition are shared with the target. For a sample of 1,959 acquisitions, we find that acquisitions of profitable targets by acquirers with NOLs are associated with higher acquisition premiums than acquisitions by non-NOL acquirers. This result indicates that potential post-acquisition tax benefits from use of acquirer NOLs are shared with the target in the form of higher transaction prices. We also find that the acquirer's merger announcement stock price response is positively associated with these tax benefits, which is consistent with the conclusion that acquirers retain part of these potential tax benefits.

This study examines whether acquirer NOL related tax benefits generated in an acquisition are shared with the target. For a sample of 1,986 acquisitions, we find that acquisitions of profitable targets by acquirers with NOLs are associated with higher acquisition premiums than acquisitions by non-NOL acquirers. This result indicates that potential post-acquisition tax benefits from use of acquirer NOLs are shared with the target in the form of higher transaction prices. We also find that the acquirer’s merger announcement stock price response is positively associated with these tax benefits, which is consistent with the conclusion that acquirers retain part of these potential tax benefits.

Tax benefits often are a significant source of value in an acquisition. Tax savings from a step up in tax basis can produce substantial tax benefits to the acquirer, and the target’s owners often time capture a portion of those tax benefits in the form of a higher purchase price. Similarly, an acquirer can sometimes use the tax attributes, such as NOLs, of a target post-closing to reduce the tax obligations of the combined firm. The value of the tax savings from use of the target’s NOLs are uncertain based regarding: i) the ultimate limit on use of those NOLs under IRC Section 382, and ii) profitability of the combined firm post-closing.

In this study, we analyze a sample of acquisitions of U.S. target corporations with NOLs, and for which we can obtain information from fairness opinions about values ascribed to target NOLs by investment bankers.

We believe the information in this study will be useful to professionals involved in transactions in which the value of tax attributes such as NOLs is a significant issue.

Firms with tax attributes such as capital losses, net operating losses, etc. can potentially loss these attributes in a M&A transaction which will lead to the loss of firm's value. Thus, if a M&A transaction increases the likelihood of losing tax attributes for the acquiring corporation, valuation, acquisition premiums, of the target corporation is expected to drop. Our analysis indicates that acquisition premiums are negatively related to the probability of losing tax attributes for the acquiring corporations with net operating losses. That is, our results show that when the M&A transaction increases the probability of losing tax attributes for the acquiring corporation, the acquiring corporation will offer less acquisition premium to the target it pursues.