Private Equity and Local Public Finances

Abstract

We study the economic impact of private equity investments on local governments, which are important corporate stakeholders. Examining over 12,000 deals and private firm data in Europe, we document that target firms' effective tax rates and total tax expenses decrease by 15% and 12% after deals. At the same time, target firms invest more in human and physical capital. Using administrative data from Germany and exploiting the staggered nature of deals at the local level, we document that private equity activity is negatively associated with tax revenues and the spending of local governments and triggers creative destruction within the local economy. Collectively, our findings suggest that corporate tax avoidance serves as a cost-cutting channel in the private equity sector and constrains the finances of local governments.

Keywords: Private Equity, Leveraged Buyouts, Investments, Tax Avoidance, Public Finances

JEL Classification: G31, G34, H25, H26, H70