Ownership Efficiency and Tax Advantages : The Case of Private Equity Buyouts

Private equity firms are drivers of the ongoing international restructuring process. Extensive use of leverage gives private equity firms a tax advantage in the market for corporate control. We show that with limited deductibility of acquisition costs, these tax advantages will affect the efficiency of the market for corporate control: a private equity firm can outbid more efficient incumbent bidders. These inefficiencies can be substantial if bidding competition or competition in the product market is limited. We also show that there are too many buyouts and acquisitions in a double taxation system because acquisitions create deductions for buyers.