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Investment income taxes and private equity acquisition activity

Alex Holcomb, Paul Mason and Harold H. Zhang

Journal of Empirical Finance, 2020, vol. 59, issue C, 25-51

Abstract: Utilizing a novel identification strategy, we uncover evidence that reducing the investment income tax rate increases acquisition activity by private equity acquirers. Applying a difference-in-difference methodology, we find that acquisitions sponsored by private equity firms nearly doubled following the investment income tax rate reductions associated with the Taxpayer Relief Act of 1997 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. We attribute our findings to private equity fund structures and managing partners’ ability to capture the expected benefit of lower capital gains tax rates. These findings are robust to controlling for target shareholders’ tax incentives, as well as firm, industry, and macroeconomic factors possibly influencing acquisition activity.

Keywords: Investment income taxes; Capital gains; Acquisitions; Private equity; Carried interest (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jempfin.2020.07.007

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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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