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Assessing the Impact of Management Buyouts on Economic Efficiency: Plant-Level Evidence from the United Kingdom

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  • Richard Harris

    (Department of Economics and Finance, University of Durham, UK)

  • Donald S. Siegel

    ()
    (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA)

  • Mike Wright

    (Business School, University of Nottingham, UK.)

Abstract

We assess the total factor productivity (TFP) of plants before and after management buyouts (MBOs), using the Annual Business Inquiry Respondents Database (ARD) file, which contains longitudinal data for approximately 36,000 U.K. manufacturing establishments. Our preliminary results suggest that these MBO establishments were less productive than comparable plants before the transfer of ownership. We also find that MBO plants experienced a substantial increase in productivity after a buyout. These post-buyout productivity gains appear to be pervasive across industries. The results imply that the improvement in economic performance may be due to measures undertaken by new owners or managers to reduce the labor intensity of production, through the outsourcing of intermediate goods and materials. Our evidence suggests that MBOs may be a useful mechanism for reducing agency costs and enhancing economic efficiency. More generally, the findings are consistent with recent theoretical and empirical evidence (Jovanovic and Rousseau (2002a, 2002b)) suggesting that takeovers result in the reallocation of a firm's resources to more efficient uses and to better managers.

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Paper provided by Rensselaer Polytechnic Institute, Department of Economics in its series Rensselaer Working Papers in Economics with number 0304.

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Date of creation: Oct 2003
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Handle: RePEc:rpi:rpiwpe:0304

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  1. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
  2. Frank R Lichtenberg & Donald Siegel, 1989. "The Effects Of Leveraged Buyouts On Productivity And Related Aspects Of Firm Behavior," Working Papers 89-5, Center for Economic Studies, U.S. Census Bureau.
  3. Boyan Jovanovic & Peter L. Rousseau, 2002. "The Q-Theory of Mergers," NBER Working Papers 8740, National Bureau of Economic Research, Inc.
  4. Kaplan, Steven, 1989. "The effects of management buyouts on operating performance and value," Journal of Financial Economics, Elsevier, vol. 24(2), pages 217-254.
  5. Boyan Jovanovic & Peter L. Rousseau, 2002. "Mergers as Reallocation," NBER Working Papers 9279, National Bureau of Economic Research, Inc.
  6. Lichtenberg, Frank R & Siegel, Donald, 1990. "The Effect of Ownership Changes on the Employment and Wages of Central Office and Other Personnel," Journal of Law and Economics, University of Chicago Press, vol. 33(2), pages 383-408, October.
  7. Jensen, Michael C, 1993. " The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Finance, American Finance Association, vol. 48(3), pages 831-80, July.
  8. Kaplan, Steven N., 1991. "The staying power of leveraged buyouts," Journal of Financial Economics, Elsevier, vol. 29(2), pages 287-313, October.
  9. Harris, Richard I D & Drinkwater, Stephen, 2000. " UK Plant and Machinery Capital Stocks and Plant Closures," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(2), pages 243-65, May.
  10. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  11. Amess, Kevin, 2002. "Management Buyouts and Firm-Level Productivity: Evidence from a Panel of UK Manufacturing Firms," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(3), pages 304-17, August.
  12. Frank R. Lichtenberg & Donald Siegel, 1989. "The Impact of R&D Investment On Productivity - New Evidence Using Linked R&D-LRD Data," NBER Working Papers 2901, National Bureau of Economic Research, Inc.
  13. Frank R. Lichtenberg & Donald Siegel, 1987. "Productivity and Changes in Ownership of Manufactoring Plants," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3), pages 643-684.
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