Management Buyouts: Evidence on Taxes as a Source of Value



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    • Graduate School of Business, University of Chicago. I wish to thank Paul Asquith, Alan Auerbach, Richard Caves, Harry DeAngelo, Paul Healy, Mike Jensen, Krishna Palepu, Jim Poterba, David Reishus, Rick Ruback, Myron Scholes, Andrei Shleifer, Abbie Smith, Larry Summers, Rob Vishny, and seminar participants at Harvard University and the NBER for helpful comments on earlier versions of this paper. The Division of Research at Harvard Business School provided research support.


This paper estimates the value of tax benefits in 76 management buyouts of public companies completed in the period 1980 to 1986. The median value of tax benefits, estimated at the time the buyout company goes private, has a lower bound of 21% and an upper bound of 143% of the premium paid to pre-buyout shareholders. The estimated value depends on the rate buyout debt is repaid and the tax rate applied to the interest deductions. The paper also presents evidence on the actual taxes paid and debt repayment rates by these companies after the buyout. The results in this paper suggest that tax benefits are an important source of the wealth gains in management buyouts.