The Impact of Private Equity Ownership on Corporate Tax Avoidance

Brad Badertscher (), Sharon P. Katz () and Sonja Olhoft Rego ()
Additional contact information
Brad Badertscher: University of Notre Dame
Sharon P. Katz: Harvard Business School, Accounting and Management Unit
Sonja Olhoft Rego: University of Iowa

No 10-004, Harvard Business School Working Papers from Harvard Business School

Abstract: This study investigates whether private equity (PE) firms influence the tax practices of their portfolio firms. Prior research documents that PE firms create economic value in portfolio firms through effective governance, financial, and operational engineering. Given PE firms' focus on value creation, we examine whether PE firms influence the extent and types of tax avoidance at portfolio firms as an additional source of economic value. We document that PE-backed portfolio firms engage in significantly more nonconforming tax planning and have lower marginal tax rates than other private firms. Moreover, we document that PE-backed portfolio firms pay 14.2 percent less income tax per dollar of pre-tax income than non-PE backed firms, after controlling for NOLs and debt tax shields. We find additional tax savings for PE-backed portfolio firms that are either majority-owned or owned by large PE firms, consistent with PE ownership stake, expertise, and resources serving as important factors in the tax practices of portfolio firms. We infer that PE firms view tax planning as an additional source of economic value in their portfolio firms, where the benefits outweigh any potential reputational costs associated with corporate tax avoidance.

Keywords: Private equity; ownership structure; tax avoidance; tax planning; tax aggressiveness; book-tax differences. (search for similar items in EconPapers)
Pages: 58 pages
Date: 2009-07, Revised 2010-03
New Economics Papers: this item is included in nep-acc and nep-pbe
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Citations: View citations in EconPapers (3)

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