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Private Equity and Firm Performance

Paper Session

Sunday, Jan. 6, 2019 8:00 AM - 10:00 AM

Atlanta Marriott Marquis, International 6
Hosted By: American Economic Association
  • Chair: Josh Lerner, Harvard University

The Social Impact of Private Equity Over the Economic Cycle

Steven J. Davis
,
University of Chicago
John Haltiwanger
,
University of Maryland
Kyle Handley
,
University of Michigan
Josh Lerner
,
Harvard University
Benjamin Lipsius
,
University of Michigan

Abstract

We study the impact of U.S. private equity buyouts on firm-level employment, job reallocation, earnings per worker, and labor productivity. Our sample covers thousands of buyouts from 1980 to 2013, which we link to Census micro data on the target firms, their establishments, and millions of comparable firms and establishments that serve as controls. Our results uncover striking differences in the real effects of buyouts, depending on the nature of the target firm, GDP growth, and credit market conditions. Employment at target firms shrinks by nearly 13% relative to controls over two years in buyouts of publicly listed firms but expands by 11% in buyouts of privately held firms. Slower GDP growth after the buyout brings lower employment growth at targets (relative to controls), as does a widening of credit spreads. Buyouts lead to productivity gains at target firms relative to controls – nine percentage points, on average, over two years post buyout. Tighter credit conditions at the time of the buyout are associated with much larger post-buyout productivity gains in target firms. A post-buyout widening of credit spreads or slowdown in GDP growth sharply curtails productivity gains in public-to-private deals.

Private Equity Buyouts and Workplace Safety

Jonathan Cohn
,
University of Texas-Austin
Nicole Nestoriak
,
U.S. Bureau of Labor Statistics
Malcolm Wardlaw
,
University of Texas-Dallas

Abstract

This paper presents evidence of a large, persistent decline in establishment-level workplace injury rates after private equity (PE) buyouts of publicly-traded firms but not already-private firms. Cross-sectional evidence further links the public-firm post-buyout decline to alleviation of market pressure to focus on short-term performance. Employment drops more in low-injury risk establishments, and the fall in injury rates does not correlate with reductions in employment post-buyout, suggesting that systematic outsourcing of dangerous jobs or underreporting due to layoff concerns is unlikely to explain the results. Overall, our results suggest a novel dimension on which buyouts improve firms' fundamental operational competencies.

The Deregulation of the Private Equity Markets and the Decline in IPOs

Michael Ewens
,
California Institute of Technology
Joan Farre-Mensa
,
Northeastern University

Abstract

The deregulation of securities laws in the 1990s—and in particular the National Securities Markets Improvement Act of 1996—has facilitated the process of raising capital privately and been a key driver of the decline in U.S. IPOs. Privately-held startups are now able to grow to a size historically available only to their public peers. The IPO decline is not a market failure in the process of going public. Rather, it is the result of founders taking advantage of their increased bargaining power and lower cost of being private to realize their preference for control by choosing to remain private.

When Investor Incentives and Consumer Interests Diverge: Private Equity in Higher Education

Charlie Eaton
,
University of California-Merced
Sabrina T. Howell
,
New York University
Constantine Yannelis
,
New York University

Abstract

This paper studies the effect of private equity buyouts in the for-profit postsecondary education sector. Employing novel data on 88 private equity deals and 994 schools with private equity ownership, we find that private equity buyouts lead to higher enrollment and profits, but also to lower education inputs, lower graduation rates, higher tuition, higher per-student debt, lower student loan repayment rates, and lower earnings among graduates. Neither selection ability of the private equity firms nor changes to the student body composition seem to explain our results. An important mechanism for the effects we observe is that private-equity owned schools are better able to capture government aid.
Discussant(s)
Antoinette Schoar
,
Massachusetts Institute of Technology
Steven Kaplan
,
University of Chicago
René Stulz
,
Ohio State University
Per Stromberg
,
University of Chicago
JEL Classifications
  • D2 - Production and Organizations
  • J3 - Wages, Compensation, and Labor Costs