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Capital gains taxation and shareholder wealth in takeovers

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Before December 1999, the capital gains of shareholders who sold their shares into Australian takeovers have been taxable irrespective of payment method. Subsequently, shareholders can elect to rollover capital gains in equity takeovers. We examine the effect of this change on the association between target shareholder capital gains and bidder and target firm shareholder wealth. The results indicate that prior to the regulatory change, cash consideration results in higher target shareholder returns for non-taxation reasons. After the introduction of capital gains tax rollover relief, we find that target and acquiring firm shareholders earn lower returns when cash consideration is offered to shareholders with greater capital gains.

Keywords: Capital gains taxation; G32; G34; H24; Mergers and acquisitions; Method of payment

Document Type: Research Article


Affiliations: 1: School of Accounting, University of Technology, Sydney, NSW 2007, Australia 2: Business School, University of Western Australia, Perth, WA 6009, Australia

Publication date: June 1, 2010


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