Private Equity and Taxes

Abstract

We study companies' tax avoidance behavior after being acquired in a private equity transaction. Exploiting rich European firm-level data in a matched-sample difference-in-differences setting, we find that target companies' effective tax rates decrease by 13 percent. This finding is in line with the hypothesis that private equity investors create shareholder value by extracting money from the government. While our evidence suggests that target firms engage more heavily in profit shifting, we do not find strong evidence for a tax-motivated leverage channel. Target firms experience lower asset and productivity growth when they engage in significant tax avoidance after the deal.

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

JEL Classification: G31, G34, H26