Research Details

Abstract

This paper estimates the magnitude of tax costs and their impact on the decision to divest assets via taxable sales rather than tax-free spin-offs. 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 manager 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; and second, managers choose taxable sales because the acquisition premia on the sales exceed the avoidable tax costs.

Type

Article

Author(s)

Date Published

1999

Citations

. 1999. The Impact of Taxes on the Choice of Divestiture Method. Journal of Accounting and Economics.(2): 117-150.