The effect of transaction structure on price: Evidence from subsidiary sales

We analyze the effect of tax-based transaction structure on the acquisition price of corporate subsidiaries. For a sample of 200 subsidiary stock acquisitions, the evidence weakly supports the conclusion that acquisition premiums are higher in transactions accompanied by an I.R.C. 338(h)(10) election. We find that the tax benefits generated by the 338(h)(10) election are positively correlated with acquisition premiums. Overall, this study indicates that the tax structure of a subsidiary sale influences the price paid in the transaction, and the tax structure selected is a function of a divesting parent's tax basis in the subsidiary's stock and net assets. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: H25; G34.