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Private Equity and Long‐Run Investment: The Case of Innovation


A long-standing controversy is whether LBOs relieve managers from short-term pressures from public shareholders, or whether LBO funds themselves are driven by short-term profit motives and sacrifice long-term growth to boost short-term performance. We investigate 495 transactions with a focus on one form of long-term activities, namely investments in innovation as measured by patenting activity. We find no evidence that LBOs are associated with a decrease in these activities. Relying on standard measures of patent quality, we find that patents granted to firms involved in private equity transactions are more cited (a proxy for economic importance), show no significant shifts in the fundamental nature of the research, and are more concentrated in the most important and prominent areas of companies' innovative portfolios.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 66 (2011)
Issue (Month): 2 (04)
Pages: 445-477

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Handle: RePEc:bla:jfinan:v:66:y:2011:i:2:p:445-477
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  1. Lichtenberg, Frank R. & Siegel, Donald, 1990. "The effects of leveraged buyouts on productivity and related aspects of firm behavior," Journal of Financial Economics, Elsevier, vol. 27(1), pages 165-194, September.
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  7. Hall, Bronwyn H., 1992. "Investment and Research and Development at the Firm Level: Does the Source of Financing Matter?," Department of Economics, Working Paper Series qt5j59j6x3, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  8. Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2003. "When Does The Market Matter? Stock Prices And The Investment Of Equity-Dependent Firms," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 969-1005, August.
  9. Meulbroek, Lisa K, et al, 1990. "Shark Repellents and Managerial Myopia: An Empirical Test," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1108-17, October.
  10. Lanjouw, Jean O & Pakes, Ariel & Putnam, Jonathan, 1998. "How to Count Patents and Value Intellectual Property: The Uses of Patent Renewal and Application Data," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 405-32, December.
  11. Steven N. Kaplan & Jeremy C. Stein, 1991. "The Evolution of Buyout Pricing and Financial Structure," NBER Working Papers 3695, National Bureau of Economic Research, Inc.
  12. Hall, Bronwyn H & Griliches, Zvi & Hausman, Jerry A, 1986. "Patents and R and D: Is There a Lag?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 265-83, June.
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