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 language | English (US) |
|---|---|
| Pages (from-to) | 117-150 |
| Number of pages | 34 |
| Journal | Journal of Accounting and Economics |
| Volume | 28 |
| Issue number | 2 |
| DOIs | |
| State | Published - Dec 1999 |
Funding
We thank Robert Chirinko, Julie Collins, Merle Erickson, Jennifer Francis, David Guenther, Deen Kemsley, Richard Leftwich, Lillian Mills, Richard Sansing, Doug Shackelford, Abbie Smith, Robert Trezevant, Ross Watts (the editor), Ed Outslay (the referee), as well as an anonymous referee, and workshop participants at the University of Chicago and Michigan State University for helpful comments. Marcus Butler, Massimo Capretta, Jeff Maydew, Britt Trukenbrod, and Ira Weiss provided excellent research assistance. We appreciate the willingness of Steve Cohen of Ernst & Young, and Albert Remeikis and Mark Boyer of PricewaterhouseCoopers (Washington National Tax Service) to discuss divestiture-related issues at length. Finally, we are grateful to the Graduate School of Business of the University of Chicago, to KPMG LLP, to the William S. Fishman Faculty Research Fund, and to the Ernst & Young Foundation for financial support.
Keywords
- Divestitures
- G34
- H25
- Income smoothing
- M41
- Spin-offs
- Taxes
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics