The Impact of Private Equity Ownership on Portfolio Firms' Corporate Tax Planning
Coauthor(s): Brad Badertscher, Sonja Olhoft Rego.
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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.
Source: Working Paper No. 1338282
Badertscher, Brad, Sharon Katz, and Sonja Olhoft Rego. "The Impact of Private Equity Ownership on Portfolio Firms' Corporate Tax Planning." Working Paper No. 1338282 , Harvard Business School Accounting & Management Unit, March 2010.