Debt-Related Tax Shields and Private Equity: Myth or Reality?

Posted: 22 Jan 2013

See all articles by Alexander Knauer

Alexander Knauer

Handelshochschule Leipzig (HHL)

Alexander D.F. Lahmann

Handelshochschule Leipzig (HHL)

Magnus Pflücke

HHL Leipzig Graduate School of Management

Bernhard Schwetzler

HHL Leipzig Graduate School of Management - Department of Finance

Date Written: January 18, 2013

Abstract

In this paper we address the magnitude of debt-related tax shields employing a proprietary data set of 56 German leveraged buyouts (LBOs) completed between 1997 and 2011. In particular we examine the relevance and performance contribution of tax shields under different financing policies, and the economic impact of limiting tax-deductible interest based on the new tax code introduced in 2008 in Germany. We highlight that LBO tax shields are significant in terms of size, but there is little evidence for a significant performance contribution. Our results suggest that the economic impact from limiting tax-deductible interest in Germany is low for LBOs.

Keywords: Leverage, buyouts, tax-deductible interest, interest barrier, tax reform

JEL Classification: G24, G32, G34, G38

Suggested Citation

Knauer, Alexander and Lahmann, Alexander D.F. and Pflücke, Magnus and Schwetzler, Bernhard, Debt-Related Tax Shields and Private Equity: Myth or Reality? (January 18, 2013). Available at SSRN: https://ssrn.com/abstract=2204336 or http://dx.doi.org/10.2139/ssrn.2204336

Alexander Knauer

Handelshochschule Leipzig (HHL) ( email )

Jahnallee 59
Leipzig, 04109
Germany

Alexander D.F. Lahmann

Handelshochschule Leipzig (HHL) ( email )

Jahnallee 59
Leipzig, 04109
Germany

Magnus Pflücke (Contact Author)

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
Leipzig, 04109
Germany

Bernhard Schwetzler

HHL Leipzig Graduate School of Management - Department of Finance ( email )

Jahnallee 59
D-04109 Leipzig
Germany
+49-341-9851-685 (Phone)
+49-341-9851-689 (Fax)

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