Did the tax cuts and Jobs Act of 2017 induce a valuation premium on U.S. target firms? : a study on the effects of the TCJA on target valuations in acquisition deals
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- Master Thesis 
Our study examines the effect of the 2017 Tax Cuts and Jobs Act (TCJA) on the valuations of U.S. target firms in acquisition deals. The TCJA was the single most extensive revision of the U.S. tax code in more than 30 years and introduced a complete overhaul of the corporate tax system, substantially reducing taxes for U.S. corporations. Using data from Bureau van Dijk’s Zephyr and Orbis databases, we match U.S. targets with comparable foreign target firms before and after the implementation of the TCJA using a Propensity Score Matching model. Subsequently, we run a Difference-in-Differences regression on our matched sample to estimate the effect of the TCJA. We find that the TCJA increased the value of the average U.S. target firm by 32%. Our findings provide evidence that U.S. firms were systematically undervalued relative to their foreign competitors prior to the TCJA and that the reform induced a valuation premium on U.S. firms relative to similar foreign firms. We find no evidence for an increase in target valuations in anticipation of a future tax reform similar to the one observed in public firm valuations (Gaertner et al., 2019; Wagner et al., 2018, 2020). The valuation effect is concentrated among domestic firms as there is no significant increase in the valuations of U.S. multinational corporations. We also find that the valuation increase is greater for manufacturing firms than service providers and that high-value firms likely benefitted the most from the tax reform. Overall, our results provide evidence that the TCJA made U.S. targets more attractive for acquirers.