This study examines the valuation consequences of control-related outcomes that follow toehold acquisitions. We find evidence that toehold acquisitions facilitate value enhancing control transfers. The types of control transfers not only include takeovers, but also internal mechanisms, such as proxy fights and management turnovers. We find that toehold targets experiencing such control transfers exhibit an abnormal increase in share value, while those not experiencing such control transfers exhibit an abnormal decrease in share value. The results suggest that the positive valuation effect associated with toehold acquisitions reflects the expected benefits of subsequent control transfers.

In a recent article [1], Beedles suggests that the valuation process for cash outflows (or negative benefits using his terminology) is, in some sense, different from the valuation process for cash inflows. This result, however, is not consistent with the assumption of perfect capital markets. Any cash outflow from one firm represents a cash inflow to some other firm(s) or investor(s). Consequently, any difference in the valuation processes for cash outflows and cash inflows will create profitable arbitrage possibilities.

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ABSTRACT We examine a distribution that is taxed as a capital gain rather than as a dividend. Since the distribution induces a realized capital gain while the price change is an unrealized gain, ex‐day return behavior provides evidence of the value of tax‐timing capital gains. We show that investors are compensated 7¢ in unrealized gains for each dollar of realized capital gains, that is, $1 of realized capital gains is equivalent to 93¢ of unrealized gains. An investor with a tax rate on realized gains of 15% has an effective tax rate on unrealized capital gains of 8.6%.