Do Firms have Tax-Influenced Capital Structure Targets? Evidence from Taken Over Companies that Became Subsidiaries

The study extends the corporate finance and taxation literature by analyzing the existence and convergence towards a regression based target capital structure of newly acquired subsidiaries, private and public ones, in an international context. The pre-merger deviation of the new subsidiary's debt-to-asset ratio from its target capital structure has a negative influence on the post-merger conversion towards its capital structure target. Taxes positively influence the leverage deviation and convergence for underleveraged new subsidiaries that have spare debt capacity to exploit a comparative tax advantage by carrying more debt. The deviation from the target capital structure is reversed by 26.57% within 3 years after the M&A. Targets taken over by financial acquirers who use holdings revers the 4.52% increase in total leverage occurring during the M&A completion year in the third post-merger year. A part of acquirers' financial debt used to take over the target is shifted onto the new subsidiary in the form of internal trade credit