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Leveraged Buyouts and Tax Incentives

Author

Listed:
  • Gerald D. Newbould
  • Robert E. Chatfield
  • Ronald F. Anderson

Abstract

We investigate the tax incentives for leveraged buyouts by measuring the change in taxes paid by a firm due to a buyout. Estimates are made of the change in taxes paid by 23 of the largest leveraged buyouts in 1988, 1989 and 1990 under three different tax structures and use a pre-TRA '86 tax structure as a comparison point. A significant portion of buyout premiums still appear to be caused by a reduction in taxes. But, on average, after the Tax Reform Act, less than half the premium can be attributed to the reduction in taxes. Further, the Tax Reform Act levy of a capital gains tax on the target firm in the case of a Section 338 election (step-up of the assets basis) appears to have effectively eliminated the step-up option, unless there is a method of avoiding this capital gains tax as the taxation literature hints.

Suggested Citation

  • Gerald D. Newbould & Robert E. Chatfield & Ronald F. Anderson, 1992. "Leveraged Buyouts and Tax Incentives," Financial Management, Financial Management Association, vol. 21(1), Spring.
    • Handle: RePEc:fma:fmanag:newbould92
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    Cited by:

    1. Löffler, Andreas, 2002. "Miles-Ezzell's WACC Approach Yields Arbitrage," Hannover Economic Papers (HEP) dp-248, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    2. Van de Gucht, Linda M. & Moore, William T., 1998. "Predicting the duration and reversal probability of leveraged buyouts," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 299-315, October.
    3. Thorsten Knauer & Friedrich Sommer, 2012. "Interest barrier rules as a response to highly leveraged transactions," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 11(2), pages 206-232, May.

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