Private Equity and Taxes

50 Pages Posted: 27 Dec 2018

See all articles by Marcel Olbert

Marcel Olbert

University of Mannheim - Business School

Peter Severin

University of Mannheim

Date Written: December 11, 2018

Abstract

We study companies' tax avoidance behavior after being acquired in a private equity transaction. Using firm-level data from Europe, we analyze target firms' tax payments after the acquisition compared to a carefully selected control group in a matched-sample difference-in-differences setting. We find that target companies' effective tax rate decreases by 16.14% relative to the unconditional mean. 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 direct evidence in support of a tax-motivated leverage channel. We further show that those target firms that become more tax efficient experience significantly lower asset and employment growth than target firms with no or moderate tax savings after the buyout. This finding indicates that tax savings are not used to finance investment but are directly transferred to shareholders.

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

JEL Classification: G31, G34, H26

Suggested Citation

Olbert, Marcel and Severin, Peter, Private Equity and Taxes (December 11, 2018). Available at SSRN: https://ssrn.com/abstract=3287687 or http://dx.doi.org/10.2139/ssrn.3287687

Marcel Olbert

University of Mannheim - Business School ( email )

Schloss Ostfl├╝gel
Mannheim, 68131
Germany

Peter Severin (Contact Author)

University of Mannheim

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

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