Working Paper No. 841

Ownership Efficiency and Tax Advantages: The Case of Private Equity Buyouts

Published: June 11, 2010, revised May 2011Pages: 32Keywords: Capital Gains Tax; Corporate Tax; Ownership Efficiency; Private Equity; Buyouts; LBOs; M&AsJEL-codes: D20; F23; G18; H20; H25; H26; L10; L13

Ownership Efficiency and Tax Advantages: The Case of Private Equity Buyouts Pehr-Johan Norbäck, Lars Persson and Joacim Tåg


Commentators on the private equity industry often claim that favorable tax treatment gives private equity firms advantages in the market for corporate control. But we show that tax advantages do not affect the equilibrium ownership of corporate assets when acquisition costs are fully deductible since buyers' valuations of assets are then independent of taxes. However, tax advantages are of importance under limited bidding competition, limited deductibility and in the presence of oligopolistic externalities in the product market. We also show that from an efficiency perspective, there are too many acquisitions in a double taxation system because acquisitions create deductions for buyers that are not available to sellers.

 

Pehr-Johan Norbäck

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Ph: +46 8 665 4522
Mob: +46 73 547 3379
pehr-johan.norback@if...

Joacim Tåg

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Ph: +46 8 665 4524
joacim.tag@ifn.se

An Agenda for Europe

Institutional Reform for Innovation and Entrepreneurship

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The authors of this book, Niklas Elert, Magnus Henrekson and Mikael Stenkula, advise the economies of the European Union to become more entrepreneurial in promoting innovation and economic growth. The authors propose a reform strategy with respect to several aspects to achieve this goal.

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