TAXES AND THE RETURNS TO FOREIGN ACQUISITIONS IN THE UNITED-STATES

This paper documents a substantial intertemporal variation in the abnormal returns of U.S. companies acquired by foreign firms over the 1979-1988 period. Returns decrease after 1980, when the 1981 Economic Recovery Tax Act was passed, and increase after 1986, when the Tax Reform Act went into effect. Similar results hold for acquisitions of partial ownership interests in U.S. firms by foreign companies. These findings are unchanged after controlling for exchange rates and for the other characteristics of the acquisitions. Overall, our findings are consistent with the conjecture that the U.S. tax system has a substantial impact on the benefits of foreign acquisitions in the U.S.