Taxes and Corporate Structure : Evidence from Mergers between Parent Companies and Wholly Owned Subsidiaries in Korea

I study the effects of taxes on parent{subsidiary structures. To do so, I investigate mergers involving Korean firms during a period in which tax consolidation was not allowed. In particular, I analyze mergers through which a parent company and a wholly owned subsidiary combine into one legal entity (a P-S merger) and thus do not involve cash transfers, changes in ownership structure, or operational synergy. The majority of P-S mergers occur between profitable firms and loss firms, likely leading to tax savings. Merger announcement returns are positively associated with estimated tax savings. Consistent with the loss of the option to bankrupt a poorly performing subsidiary, however, announcement returns are lower when the subsidiary is the loss firm, especially in the absence of a debt guaranty by the parent company. The results overall are consistent with the proposition that tax considerations play a role in shaping parent-subsidiary structures and that investors incorporate these considerations into valuation