The Effects of Changes in Tax Laws on Corporate Reorganization Activity
Myron S. Scholes
Mark A. Wolfson
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
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. We 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 US 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.
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