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Management Buyouts: Evidence on Taxes as a Source of Value

Steven Kaplan
The Journal of Finance
Vol. 44, No. 3, Papers and Proceedings of the Forty-Eighth Annual Meeting of the American Finance Association, New York, New York, December 28-30, 1988 (Jul., 1989), pp. 611-632
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328773
Stable URL: http://www.jstor.org/stable/2328773
Page Count: 22
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Management Buyouts: Evidence on Taxes as a Source of Value
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Abstract

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.

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