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NBER Working Paper # September 1989

THE EFFECTS OF CHANGES IN TAX LAWS ON CORPORATE

REORGANIZATION ACTIVITY

ABSTRACT

We present evidence that changes in tax laws passed in the 1980s, culminating with the Tax Reform Act of 1986, had a first order effect on observed merger and acquisition activity in the US. We also present evidence of increased reliance on certain institutional arrangements (unit management buyouts and going-private transactions) used to effect mergers and acquisitions that were designed to reduce the nontax costs of transacting, thereby enabling tax benefits to be realized in a larger number of mergers and acquisitions than might otherwise have occurred.

We begin with a "closed-economy" perspective, focusing on the effects of changes in tax

laws on the demand for mergers and acquisitions of us corporations by US corporations. \Ve

then broaden the scope of inquiry by modeling and testing the effects of changes in tax laws on the demand for mergers and acquisitions of LJS corporations by foreign multinationals. Here we predict and present confirmatory evidence that while the 1986 Tax Act discouraged transactions among US corporations, it increased the demand for merger and acquisition transactions between US sellers and foreign buyers.

Myron S. Scholes Stanford University Graduate School of Business Hoover Institution Stanford, CA 94305

Mark A. Wolfson Stanford University Graduate School of Business Hoover Institution Stanford, CA 94305