Do windfall non‐debt tax shields from acquisitions affect corporate debt issues?

Purpose – The purpose of this paper is to identify possible tax synergies from acquisitions when the acquiring firm gains a non‐debt tax shield (NDTS) not directly associated with its own past performance, or a windfall NDTS. One possible benefit of a windfall NDTS is reduced reliance on interest tax shields to lower the firm's marginal tax rate (MTR). Design/methodology/approach – This paper tests the likelihood of issuing debt following acquisitions of windfall non‐debt tax attributes with logistic regressions. Both acquirers and targets are publicly held US firms. Acquisitions are completed from 1987 to 2003, and debt issues are observed following the deal. Target firm tax attributes are defined as the total tax spread, tax loss carryforward (TLCF), and the MTR. Findings – Target firm tax spread and TLCFs are inconsequential to the acquirer's likelihood of issuing future debt, suggesting that tax synergies are relatively unimportant motives for acquisitions. As predicted, the target firm MTR is not significant to acquirer debt issues. Originality/value – This paper makes several contributions. First, the notion of tax synergies from acquisitions is unresolved. This paper continues the search for tax synergies in acquisitions by examining the importance of acquired NDTS in the post‐acquisition period. Second, this paper examines the influence of NDTS on debt issuance in a post‐event framework. Third, this paper provides additional evidence that corporate managers have leverage targets.