Private Equity and Taxes

Abstract

We study corporate tax avoidance and associated real effects of private equity buyouts.
Exploiting over 10,000 deals and private firm data in Europe, we document that target firms' effective tax rates decrease by 13% after the transaction. Those targets engaging in significant post-deal tax avoidance exhibit lower asset, employment, and productivity growth, but have higher payout ratios. Further tests show that buyouts induce more profit shifting and higher leverage, which erodes tax bases in high-tax countries. Collectively, our findings suggest that some private equity investors create shareholder value while imposing a negative externality on governments as tax savings accrue to global shareholders.

Keywords: Private Equity, Leveraged Buyouts, Corporate Taxation, Investments, Productivity, Profit Shifting, Leverage

JEL Classification: G31, G34, H26