Investment Income Taxes and Private Equity Acquisition Activity

Abstract

Utilizing a novel identification strategy, we uncover evidence that investment income tax rate reductions increase acquisition activity of private equity acquirers. Applying a difference-in-difference methodology, we find that acquisitions sponsored by private equity firms nearly doubled following the Taxpayer Relief Act of 1997 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. We attribute our findings to private equity firms' ability to capture the benefit of lower capital gains tax rates. These findings are robust to considering target shareholders' tax incentives as well as firm, industry, and macroeconomic factors possibly influencing acquisition activity.