State Tax Rate Changes and Leveraged Buyouts: US Evidence

This chapter investigates whether and to what extent tax benefits affect the likelihood of firms undertaking leveraged buyout (LBO) transactions.

With an identified sample of LBO firms and similar non-LBO counterparts, this chapter utilizes staggered changes in state corporate income tax rates as exogenous shocks and adopts a Logistic regression to analyze how these tax changes affect firms' probability of engaging in LBOs.

Firms are more likely to engage in LBOs after increases in corporate income tax rates. Specifically, the increase in the likelihood of firms undertaking LBOs following tax increases is between 6.9% and 12.9%. We also find that this positive relation is more pronounced for firms with higher levels of return on assets (ROA) and marginal tax rates (MTR). Finally, we report that the mean value of tax benefits accounts for between 28.5% and 170% of the premium paid to pre-buyout shareholders.

This chapter provides strong evidence that tax benefits constitute an important source of value creation in LBOs and adds to the debate regarding the role of tax benefits in LBOs.