Statutory tax rates of a country do not reflect various tax breaks, deductions, exemptions, and credits, we propose and show that government debt to GDP ratio (GOVDEBT) of a country is a better proxy for its tax competitiveness. Using a comprehensive sample of 1,884 completed cross-border acquisition transactions from the U.S. to other OECD countries, we document that the U.S.-target country GOVDEBT difference is significantly and positively related to both deal announcement return and post-deal tax saving of the acquirer. The GOVDEBT difference is also significantly and positively related to U.S.-target country deal flow. The findings remain robust when we control for the potential endogeneity of GOVDEBT difference. Our findings strongly suggest that tax avoidance is an important driver of U.S.-OECD cross-border deal flow and it increases shareholder wealth for U.S. acquirers.
(Joint work with Buhui Qiu (University of Sydney))
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