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State Tax Rate Changes and Leveraged Buyouts: US Evidence

Dawei Jin ^a

Hao Shen ^b

Haizhi Wang ^b

Desheng Yin ^c

^aZhongnan University of Economics and Law, China

^bIllinois Institute of Technology, USA

^cEast China Normal University, China

Empirical Research in Banking and Corporate Finance

ISBN: 978-1-78973-398-3, eISBN: 978-1-78973-397-6

Publication date: 12 September 2022

Abstract

Purpose

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

Design/Methodology/Approach

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.

Findings

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.

Originality/Value

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.

Keywords

Citation

Jin, D., Shen, H., Wang, H. and Yin, D. (2022), "State Tax Rate Changes and Leveraged Buyouts: US Evidence", Ferris, S.P., John, K. and Makhija, A.K. (Ed.) Empirical Research in Banking and Corporate Finance (Advances in Financial Economics, Vol. 21), Emerald Publishing Limited, Leeds, pp. 75-100. https://doi.org/10.1108/S1569-373220220000021003

Publisher

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Emerald Publishing Limited