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Does Target Tax Aggressiveness Matter in Corporate Takeovers?

We examine whether tax avoidance of target firms affects takeover pricing. We find that acquirers pay lower premiums to tax aggressive targets. This effect is concentrated in acquisitions of opaque targets and targets operating in less competitive industries, and in acquisitions in which the acquirer hires a top-tier financial advisor. Tax aggressive targets are more likely to receive a downward adjustment to the initial offer price, and are more likely to be paid with acquirers’ stock. Overall, our evidence suggests that acquirers perceive tax aggressiveness of target firms as a contingent liability and adjust takeover price accordingly.