This paper documents a novel channel of transfer of control in family firms. I provide evidence, from a natural experiment, that avoiding inheritance tax is the main motivation behind intra-group mergers. Due to tax reform that increases personal inheritance taxes by 25 percentage points, the firms burdened by a high personal inheritance tax are most likely to increase intra-group merger activities during post tax-reform period. This result suggests that firms with heavy inheritance tax burdens acquire smaller affiliates owned by the heirs. This way, heirs convert target shares to acquirer shares while avoiding inheritance tax. Among high tax burden firms, intra-group mergers are concentrated in 'central firms' within a circular ownership chain allowing the heirs to consolidate the heirs to consolidate their indirect control over the entire business. Because of these mergers, the ownership network among affiliates becomes distorted as central firms expand their boundaries in unnatural ways. Heirs do manage to avoid inheritance taxes, but minority shareholders suffer losses from these tax-motivated mergers that appear to have few operational synergies.  

Keywords: Succession Tax, Intra-group Merger, Family Firm, Transfer of Control, Ownership Structure

JEL Codes: G30, G32, G34