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Red and Blue: the relationship between the institutional context and the performance of leveraged buyout investments

Author

Listed:
  • Aviad Pe'Er

    (Stern school of business - NYU - New York University [New York] - NYU - NYU System)

  • Oliver Gottschlag

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper advances the debate concerning the relationship between politics and business conduct by investigating the influence of the institutional context on leveraged buyout investments. We propose that the formal and informal institution context in 'red' states (those dominated by the U.S. Republican Party) is more aligned with the principal strategies through which leveraged buyout investors create value than such a context is in 'blue' states (those dominated by the Democratic Party). Therefore, according to institutional theory, one would expect, ceteris paribus, a higher likelihood of buyout transactions in red states and vice versa. We analyze a sample of 10,746 U.S. buyout investments in 4,633 distinct target companies made by 2,396 different funds managed by 1,300 private equity firms from 1980 to 2003. The results indicate strong evidence of a positive association between a more aligned institutional context and both the volume of buyout activity and different measures of performance for these buyouts.

Suggested Citation

  • Aviad Pe'Er & Oliver Gottschlag, 2011. "Red and Blue: the relationship between the institutional context and the performance of leveraged buyout investments," Post-Print hal-00631579, HAL.
    • Handle: RePEc:hal:journl:hal-00631579
    DOI: 10.1002/smj.934
    as

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    Citations

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    Cited by:

    1. Blind, Georg D. & Lottanti von Mandach, Stefania, 2021. "Private Equity Buyouts in Japan: Effects on Employment Numbers," Journal of the Japanese and International Economies, Elsevier, vol. 59(C).
    2. Andreas Hoepner & Lisa Schopohl, 2015. "Red versus Blue: Do Political Dimensions Influence the Investment Preferences of State Pension Funds?," ICMA Centre Discussion Papers in Finance icma-dp2015-06, Henley Business School, University of Reading.
    3. Francesco Castellaneta & Raffaele Conti & Aleksandra Kacperczyk, 2017. "Money secrets: How does trade secret legal protection affect firm market value? Evidence from the uniform trade secret act," Strategic Management Journal, Wiley Blackwell, vol. 38(4), pages 834-853, April.
    4. Jiao Luo & Aseem Kaul & Haram Seo, 2018. "Winning us with trifles: Adverse selection in the use of philanthropy as insurance," Strategic Management Journal, Wiley Blackwell, vol. 39(10), pages 2591-2617, October.
    5. Tereza Tykvová, 2018. "Venture capital and private equity financing: an overview of recent literature and an agenda for future research," Journal of Business Economics, Springer, vol. 88(3), pages 325-362, May.
    6. Castellaneta, Francesco & Conti, Raffaele & Veloso, Francisco M. & Kemeny, Carlos A., 2016. "The effect of trade secret legal protection on venture capital investments: Evidence from the inevitable disclosure doctrine," Journal of Business Venturing, Elsevier, vol. 31(5), pages 524-541.
    7. Zhi Tang & Yang Yu, 2023. "American Economic Stakeholder Sentiments towards Chinese Firms’ Innovation Capability: The Role of State Political Environment and Firm Ownership," Sustainability, MDPI, vol. 15(18), pages 1-22, September.
    8. Leonardo M. Klüppel & Lamar Pierce & Jason A. Snyder, 2018. "Perspective—The Deep Historical Roots of Organization and Strategy: Traumatic Shocks, Culture, and Institutions," Organization Science, INFORMS, vol. 29(4), pages 702-721, August.
    9. Cao, Xiaping & Cumming, Douglas & Goh, Jeremy & Wang, Xiaoming, 2019. "The impact of investor protection law on global takeovers: LBO vs. non-LBO transactions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 59(C), pages 1-18.
    10. Chen Liu & Lynnette Purda & Hui Zhu, 2021. "Institutional influence on syndicate structure and cross‐border leveraged buyouts," Financial Management, Financial Management Association International, vol. 50(1), pages 169-202, March.
    11. Byungjun Yu & Saixing Zeng & Xiaohua Meng & Hanyang Ma & Daxin Sun, 2020. "Does natural environment prefer the right to the left? Governors' partisanship and corporate environmental performance," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(4), pages 1605-1616, July.
    12. K.S. Reddy & En Xie & Yuanyuan Huang, 2016. "Contractual buyout - a legitimate growth model in the enterprise development: foundations and implications," International Journal of Management and Enterprise Development, Inderscience Enterprises Ltd, vol. 15(1), pages 1-23.
    13. Andreas G. F. Hoepner & Lisa Schopohl, 2020. "State Pension Funds and Corporate Social Responsibility: Do Beneficiaries’ Political Values Influence Funds’ Investment Decisions?," Journal of Business Ethics, Springer, vol. 165(3), pages 489-516, September.
    14. Thams, Yannick & Bendell, Bari L. & Terjesen, Siri, 2018. "Explaining women's presence on corporate boards: The institutionalization of progressive gender-related policies," Journal of Business Research, Elsevier, vol. 86(C), pages 130-140.
    15. Thams, Yannick & Kelley, Keith & Von Glinow, Mary Ann, 2018. "Foreigners in the boardroom: The implications of attitudes toward immigration and conservatism in firms' sub-national context," Journal of Business Research, Elsevier, vol. 91(C), pages 8-18.

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