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http://ssrn.com/abstract=1777266
 
 

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Who Benefits from the Leverage in LBOs?


Tim Jenkinson


University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Rüdiger Stucke


University of Oxford - Said Business School

February 28, 2011


Abstract:     
Tax savings associated with increased levels of debt are often thought to be an important source of returns for private equity funds conducting leveraged buyouts (LBOs). However, as leverage is available to all bidders, the vendors may appropriate any benefits in the form of the takeover premium. For the 100 largest U.S. public-to-private LBOs since 2003, we estimate the size of the additional tax benefits available to private equity purchasers. We find a strong cross-sectional relationship between tax savings and the size of takeover premia; and on average the latter are around twice the size of the former. Consequently, the tax savings from increasing financial leverage essentially accrue to the previous shareholders rather than the private equity fund that conducts the LBO. It is, therefore, unlikely that (ex ante predictable) tax savings are an important source of returns for private equity funds. Furthermore, policy proposals that aim to restrict leverage or the tax-deductibility of debt are likely to have their impact mainly on existing owners of companies.

Number of Pages in PDF File: 43

Keywords: Leveraged Buyouts, Taxes, Private Equity, Takeover Premium

JEL Classification: G34, H2

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Date posted: March 6, 2011 ; Last revised: March 7, 2011

Suggested Citation

Jenkinson, Tim and Stucke, Rüdiger, Who Benefits from the Leverage in LBOs? (February 28, 2011). Available at SSRN: http://ssrn.com/abstract=1777266 or http://dx.doi.org/10.2139/ssrn.1777266

Contact Information

Tim Jenkinson (Contact Author)
University of Oxford - Said Business School ( email )
Park End Street
Oxford, OX1 1HP
United Kingdom
+44 1865 288916 (Phone)
+44 1865 288831 (Fax)
HOME PAGE: http://www.sbs.oxford.edu/timjenkinson
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Rüdiger Stucke
University of Oxford - Said Business School ( email )
Park End Street
Oxford, OX1 1HP
Great Britain
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