IDEAS home Printed from https://ideas.repec.org/a/eee/advacc/v30y2014i1p32-42.html
   My bibliography  Save this article

Pricing target NOLs in mergers and acquisitions from the participating firms' perspective

Author

Listed:
  • Chiang, Wei-Chih
  • Stammerjohan, William
  • Englebrecht, Ted D.

Abstract

While prior research has extensively examined the market response to target net operating loss carryforwards (NOLs) in mergers and acquisitions (M&A) announcements, the question of whether target NOLs are priced by the participating firms during the price negotiation process has not been explicitly addressed. Answers to this question could provide direct measures to assist firms in pricing target NOLs in M&As. Our results show that the participating firms price target NOLs based on how long it will take the acquirer to use the acquired NOL in both nontaxable and taxable acquisitions under the Tax Reform Act of 1986. Also, we find a significant difference in the market pricing and the participant pricing of target short-lived NOLs before, and continuing well after, the announcement date. Our findings suggest that the importance of the differences between the market and the participating firms perspectives should be considered when conducting future research in this area.

Suggested Citation

  • Chiang, Wei-Chih & Stammerjohan, William & Englebrecht, Ted D., 2014. "Pricing target NOLs in mergers and acquisitions from the participating firms' perspective," Advances in accounting, Elsevier, vol. 30(1), pages 32-42.
  • Handle: RePEc:eee:advacc:v:30:y:2014:i:1:p:32-42
    DOI: 10.1016/j.adiac.2014.04.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0882611014000145
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.adiac.2014.04.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    2. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    3. Kathy Hsiao Yu Hsu & Young Sang Kim & Kyojik 'Roy' Song, 2009. "The Relation Among Targets' R&D Activities, Acquirers' Returns, and In-Process R&D in the US," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(9-10), pages 1180-1200.
    4. Eli Amir & Theodore Sougiannis, 1999. "Analysts' Interpretation and Investors' Valuation of Tax Carryforwards," Contemporary Accounting Research, John Wiley & Sons, vol. 16(1), pages 1-33, March.
    5. Tomi Laamanen, 2007. "On the role of acquisition premium in acquisition research," Strategic Management Journal, Wiley Blackwell, vol. 28(13), pages 1359-1369, December.
    6. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
    7. Benjamin C. Ayers & Craig E. Lefanowicz & John R. Robinson, 2003. "Shareholder Taxes in Acquisition Premiums: The Effect of Capital Gains Taxation," Journal of Finance, American Finance Association, vol. 58(6), pages 2783-2801, December.
    8. Erickson, Merle & Wang, Shiing-wu, 2000. "The effect of transaction structure on price: Evidence from subsidiary sales," Journal of Accounting and Economics, Elsevier, vol. 30(1), pages 59-97, August.
    9. Plummer, Elizabeth R. & Robinson, John R., 1990. "Capital Market Evidence of Windfalls from the Acquisition of Tax Carryovers," National Tax Journal, National Tax Association, vol. 43(4), pages 481-89, December.
    10. Plummer, Elizabeth R. & Robinson, John R., 1990. "Capital Market Evidence of Windfalls From the Acquisition of Tax Carryovers," National Tax Journal, National Tax Association;National Tax Journal, vol. 43(4), pages 481-489, December.
    11. Kathy Hsiao Yu Hsu & Young Sang Kim & Kyojik ‘Roy’ Song, 2009. "The Relation Among Targets’ R&D Activities, Acquirers’ Returns, and In‐Process R&D in the US," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(9‐10), pages 1180-1200, November.
    12. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    13. Amir, E. & Kirschenheiter, M. & Willard, K., 1997. "Firm Valuation with Deferred Taxes: A Theoretical Framework," Papers 97-13, Columbia - Graduate School of Business.
    14. repec:bla:jfinan:v:53:y:1998:i:6:p:1839-1885 is not listed on IDEAS
    15. Hayn, Carla, 1989. "Tax attributes as determinants of shareholder gains in corporate acquisitions," Journal of Financial Economics, Elsevier, vol. 23(1), pages 121-153, June.
    16. Norman H. Moore & Stephen W. Pruitt, 1987. "The Market Pricing Of Net Operating Loss Carryforwards: Implications Of The Tax Motivations Of Mergers," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 10(2), pages 153-160, June.
    17. Givoly, Dan & Hayn, Carla, 1991. "The Aggregate and Distributional Effects of the Tax Reform Act of 1986 on Firm Valuation," The Journal of Business, University of Chicago Press, vol. 64(3), pages 363-392, July.
    18. Burton G. Malkiel, 2005. "Reflections on the Efficient Market Hypothesis: 30 Years Later," The Financial Review, Eastern Finance Association, vol. 40(1), pages 1-9, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bührle, Anna Theresa, 2021. "Do tax loss restrictions distort venture capital funding of start-ups?," ZEW Discussion Papers 21-008, ZEW - Leibniz Centre for European Economic Research.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yu, Huaibing, 2024. "Why isn't composite equity issuance favored by the stock market? A risk-based explanation for the anomaly," International Review of Financial Analysis, Elsevier, vol. 94(C).
    2. Sapienza, Paola & Polk, Christopher, 2003. "The Real Effects of Investor Sentiment," CEPR Discussion Papers 3826, C.E.P.R. Discussion Papers.
    3. Ramiah, Vikash & Xu, Xiaoming & Moosa, Imad A., 2015. "Neoclassical finance, behavioral finance and noise traders: A review and assessment of the literature," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 89-100.
    4. Asiya Sohail & Attiya Yasmin Javid, 2014. "The Global Financial Crisis and Investors’ Behaviour; Evidence from the Karachi Stock Exchange," PIDE-Working Papers 2014:106, Pakistan Institute of Development Economics.
    5. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    6. Tetsushi Homma & Yoshiro Tsutsui & Uri Benzion, 2005. "Exchange rate and stock prices in Japan," Applied Financial Economics, Taylor & Francis Journals, vol. 15(7), pages 469-478.
    7. Sudi Sudarsanam & Ashraf A. Mahate, 2003. "Glamour Acquirers, Method of Payment and Post‐acquisition Performance: The UK Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(1‐2), pages 299-342, January.
    8. Brav, Alon & Geczy, Christopher & Gompers, Paul A., 2000. "Is the abnormal return following equity issuances anomalous?," Journal of Financial Economics, Elsevier, vol. 56(2), pages 209-249, May.
    9. Linnenluecke, Martina K. & Chen, Xiaoyan & Ling, Xin & Smith, Tom & Zhu, Yushu, 2017. "Research in finance: A review of influential publications and a research agenda," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 188-199.
    10. Vinay Patel, 2015. "Price Discovery in US and Australian Stock and Options Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 27, July-Dece.
    11. Ducret, Romain, 2021. "Investors' perception of business group membership during an economic crisis : Evidence from the COVID-19 pandemic," FSES Working Papers 524, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
    12. Churyk, Natalie Tatiana, 2005. "Reporting goodwill: are the new accounting standards consistent with market valuations?," Journal of Business Research, Elsevier, vol. 58(10), pages 1353-1361, October.
    13. Kiplan Womack, 2012. "Real Estate Mergers: Corporate Control & Shareholder Wealth," The Journal of Real Estate Finance and Economics, Springer, vol. 44(4), pages 446-471, May.
    14. Attiya Yasmeen Javid, 2000. "Alternative Capital Asset Pricing Models: A Review of Theory and Evidence," PIDE Research Report 2000:3, Pakistan Institute of Development Economics.
    15. Bai, Jennie & Philippon, Thomas & Savov, Alexi, 2016. "Have financial markets become more informative?," Journal of Financial Economics, Elsevier, vol. 122(3), pages 625-654.
    16. Baker, Malcolm & Coval, Joshua & Stein, Jeremy C., 2007. "Corporate financing decisions when investors take the path of least resistance," Journal of Financial Economics, Elsevier, vol. 84(2), pages 266-298, May.
    17. An, Suwei, 2023. "Essays on incentive contracts, M&As, and firm risk," Other publications TiSEM dd97d2f5-1c9d-47c5-ba62-f, Tilburg University, School of Economics and Management.
    18. Ahmad H. Juma’h & Yazan Alnsour, 2018. "Using Social Media Analytics: The Effect of President Trump’s Tweets On Companies’ Performance," Journal of Accounting and Management Information Systems, Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies, vol. 17(1), pages 100-121, March.
    19. Kent Daniel & David Hirshleifer & Lin Sun, 2020. "Short- and Long-Horizon Behavioral Factors," The Review of Financial Studies, Society for Financial Studies, vol. 33(4), pages 1673-1736.
    20. Allen, Franklin & Gale, Douglas, 1995. "A welfare comparison of intermediaries and financial markets in Germany and the US," European Economic Review, Elsevier, vol. 39(2), pages 179-209, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:advacc:v:30:y:2014:i:1:p:32-42. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/advances-in-accounting/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.