Investment Income Taxes and Private Equity Acquisition Activity

55 Pages Posted: 11 Oct 2018

See all articles by Alex Holcomb

Alex Holcomb

Appalachian State University

Paul Mason

Baylor University

Harold H. Zhang

University of Texas at Dallas - Naveen Jindal School of Management; China Academy of Financial Research (CAFR)

Date Written: September 19, 2018

Abstract

Utilizing a novel identification strategy, we uncover evidence that investment income tax rate reductions increase acquisition activity of private equity acquirers. Applying a difference-in-difference methodology, we find that acquisitions sponsored by private equity firms nearly doubled following the Taxpayer Relief Act of 1997 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. We attribute our findings to private equity firms' ability to capture the benefit of lower capital gains tax rates. These findings are robust to considering target shareholders' tax incentives as well as firm, industry, and macroeconomic factors possibly influencing acquisition activity.

Keywords: Investment Income Taxes, Acquisitions, Private Equity, Capital Gains

JEL Classification: G24, G34, H24

Suggested Citation

Holcomb, Alex and Mason, Paul and Zhang, Harold Huibing, Investment Income Taxes and Private Equity Acquisition Activity (September 19, 2018). Available at SSRN: https://ssrn.com/abstract=3251978 or http://dx.doi.org/10.2139/ssrn.3251978

Alex Holcomb

Appalachian State University ( email )

Boone, NC 28608
United States

Paul Mason (Contact Author)

Baylor University ( email )

Waco, TX 76798
United States

Harold Huibing Zhang

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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