Private Equity and Local Public Finances

59 Pages Posted: 27 Dec 2018 Last revised: 22 Jul 2023

See all articles by Marcel Olbert

Marcel Olbert

London Business School; ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research

Peter Severin

University of Mannheim; University of Mannheim

Date Written: April 28, 2023

Abstract

We study the economic impact of private equity (PE) investments on local governments, which are important corporate stakeholders. Examining over 11,000 deals and private firm data in Europe, we document that target firms' effective tax rates and total tax expenses decrease by 15% and 13% after PE deals. At the same time, target firms expand their capital expenditures and firm boundaries, but do not increase employment. Using administrative data on the public finances of German municipalities and exploiting the geographical and time-series variation in PE deals, we document that PE activity is negatively associated with local governments' tax revenues and spending. This result is likely driven by reduced tax payments of PE portfolio firms, accompanied by only modest positive spillovers of PE investments on regional economic growth. Collectively, our findings suggest that corporate tax efficiency serves as a cost-cutting channel in the PE 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

Suggested Citation

Olbert, Marcel and Severin, Peter and Severin, Peter, Private Equity and Local Public Finances (April 28, 2023). Available at SSRN: https://ssrn.com/abstract=3287687 or http://dx.doi.org/10.2139/ssrn.3287687

Marcel Olbert

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research ( email )

United States

Peter Severin (Contact Author)

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

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