The impact of taxes on the choice of divestiture method

Edward L. Maydew*, Katherine Schipper, Linda Vincent

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

32 Scopus citations

Abstract

This paper estimates the magnitude of tax costs and their impact on the decision to divest assets via a taxable sale rather than a tax-free spin-off. We find that the tax costs are substantial, averaging 8% of market value of the divested assets, and that cross-sectional variation in tax costs has a large impact on managers' choice of divestiture method. Our results are consistent with two explanations. First, managers are willing to incur avoidable tax costs to gain earnings and cash flow benefits. Second, managers choose taxable sales because the acquisition premia on the sales exceed the avoidable tax costs.

Original languageEnglish (US)
Pages (from-to)117-150
Number of pages34
JournalJournal of Accounting and Economics
Volume28
Issue number2
DOIs
StatePublished - Dec 1999

Keywords

  • Divestitures
  • G34
  • H25
  • Income smoothing
  • M41
  • Spin-offs
  • Taxes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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