Do U.S. Firms Disguise Acquisitions to Avoid Taxes?

Our study finds evidence consistent with U.S. multinational firms disguising domestic acquisitions as corporate reorganizations to avoid repatriation-related taxes. Prior to a 2017 tax reform, we find that a combination of high potential repatriation costs and large overseas earnings balances is positively associated with domestic acquisition volume, but only in deals with low visibility to regulators and investors. Consistent with a repatriation of overseas cash, these firms' low visibility acquisitions (but not their higher-visibility counterparts) are associated with 4-7% lower overseas earnings balances. After the 2017 reform reduced the need for this tax-free repatriation technique, our tests find that the positive relationship between low visibility acquisitions, repatriation costs, and overseas earnings disappears or even reverses, despite the reform lowering the cost of investing foreign earnings in the U.S. Our results suggest that these “pseudo-reorganization” acquisitions were used to a greater extent than previously known