The litigation of tax benefit preservation plans
Abstract
Purpose
The authors study the shareholder wealth effects of the adoption and subsequent litigation confirming the validity of shareholder right plans that are enacted to protect a firm’s net operating loss (NOL) carry forwards (tax benefit preservation plans (TBPPs)). The purpose of this paper is to expand the understanding of nontraditional shareholder rights plans, which are becoming increasingly more common.
Design/methodology/approach
This paper considers abnormal returns around TBPP adoptions and Delaware Court rulings that validated their use. The authors study 118 plans adopted between 1998 and 2011. Abnormal returns are measured using both a market model and a performance-matched sample.
Findings
The authors find that abnormal returns are negative at the announcement of a new TBPP. However, the full impact of plan adoption on share prices is not evident until the Delaware Courts validated their use. The Delaware Court rulings in the case of Selectica, Inc. v. Versata Enterprises, Inc. and Trilogy, Inc. are associated with additional negative wealth effects for both prior plan adopters and the firms most likely to consider adopting a plan. These results suggest that entrenchment concerns tend to outweigh the protection of NOL carry forwards when firms adopt TBPPs.
Originality/value
This study was the first to consider the adoption of TBPPs. Currently, it is the only study that considers Delaware Court rulings related to these plans, which allows us to successfully disentangle the entrenchment hypothesis from the potential alternative hypothesis that the negative announcement period returns are driven by investors updating their expectations for firm performance.
Keywords
Acknowledgements
The authors thank an anonymous referee, Aigbe Akhigbe, Chris Anderson, Marcus Braga-Alves, Ryan Casey, Elizabeth Chorvat, Kathryn Easterday, Anne Farrell, Joon Ho Hwang, Manoj Kulchania, Kenneth Lehn, George Lin, Drew Reffett, Tom Schultz, Mehmet Yalin, Jimmy Yang, and seminar participants at the Conference on Empirical Legal Studies (2015), Eastern Finance Association Meetings (2012), Financial Management Association Asian Conference (2011), Financial Management Association Meetings (2012), Midwest Finance Association Meetings (2011), Southern Finance Association Meetings (2012), and Miami University for valuable comments. Special thanks to FactSet Research Systems Inc. for providing data (HYPERLINK "http://www.sharkrepellent.net"www.sharkrepellent.net). Support for this project was provided by the Lindmor Professorship, Miami University's Office for the Advancement of Research and Scholarship, a Farmer School of Business Summer Research Grant, and the Dolibois Faculty Development Fund. Chris Donovan and Taylor Wolfe provided excellent research assistance. Any remaining errors or omissions remain the responsibility of the authors.
Citation
Boulton, T.J. and Nixon, T.D. (2017), "The litigation of tax benefit preservation plans", Managerial Finance, Vol. 43 No. 1, pp. 76-94. https://doi.org/10.1108/MF-12-2015-0322
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited