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Do Private Equity Returns Result from Wealth Transfers and Short-Termism? Evidence from a Comprehensive Sample of Large Buyouts

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  • Jarrad Harford

    (Foster School of Business, University of Washington, Seattle, Washington 98195)

  • Adam Kolasinski

    (Mays School of Business, Texas A&M University, College Station, Texas 77842)

Abstract

We test whether the well-documented high returns of private equity sponsors result from wealth transfers from other financial claimants and counterparties and from a focus on short-term profits at the expense of long-term value. Debt investors who finance buyouts, as well as buyers of private equity portfolio companies, represent the two potential sources of wealth transfers. However, we find that, on average, public companies benefit when they buy financial sponsors' portfolio companies, experiencing positive abnormal returns upon the announcement of the acquisition and long-run posttransaction abnormal returns indistinguishable from zero. We further find that large portfolio company payouts to private equity on average have no relation to future portfolio company distress, suggesting that debt investors are not suffering systematic wealth losses either. However, we find some evidence of wealth transfers from both strategic buyers and debt investors in some special situations. Finally, we find that portfolio companies invest no differently than a matched sample of public control firms, even when they are not profitable, an observation inconsistent with short-termism. This paper was accepted by Brad Barber, finance.

Suggested Citation

  • Jarrad Harford & Adam Kolasinski, 2014. "Do Private Equity Returns Result from Wealth Transfers and Short-Termism? Evidence from a Comprehensive Sample of Large Buyouts," Management Science, INFORMS, vol. 60(4), pages 888-902, April.
  • Handle: RePEc:inm:ormnsc:v:60:y:2014:i:4:p:888-902
    DOI: 10.1287/mnsc.2013.1790
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    Cited by:

    1. James Driver & Adam Kolasinski & Jared Stanfield, 2020. "R&D or R vs. D? Firm Innovation Strategy and Equity Ownership," Working Papers 20-14, Center for Economic Studies, U.S. Census Bureau.
    2. Lai, Shaojie & Pu, Xiaoling, 2020. "Mispricing or growth? an empirical analysis of acquisition premium," Finance Research Letters, Elsevier, vol. 37(C).
    3. Michala, Dimitra, 2019. "Are private equity backed initial public offerings any different? Timing, information asymmetry and post-IPO survival," Journal of Corporate Finance, Elsevier, vol. 59(C), pages 31-47.
    4. Dutta, Anupam & Knif, Johan & Kolari, James W. & Pynnonen, Seppo, 2018. "A robust and powerful test of abnormal stock returns in long-horizon event studies," Journal of Empirical Finance, Elsevier, vol. 47(C), pages 1-24.
    5. Hege, Ulrich & Lovo, Stefano & Slovin, Myron B. & Sushka, Marie E., 2018. "Divisional buyouts by private equity and the market for divested assets," Journal of Corporate Finance, Elsevier, vol. 53(C), pages 21-37.
    6. Stanfield, Jared, 2020. "Skill, syndication, and performance: Evidence from leveraged buyouts," Journal of Corporate Finance, Elsevier, vol. 65(C).
    7. Sven Fürth & Christian Rauch, 2015. "Fare Thee Well? An Analysis of Buyout Funds’ Exit Strategies," Financial Management, Financial Management Association International, vol. 44(4), pages 811-849, October.
    8. Ayash, Brian & Bartlett, Robert P. & Poulsen, Annette B., 2017. "The determinants of buyout returns: Does transaction strategy matter?," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 342-360.
    9. Cao, Xiaping & Chan, Konan & Kahle, Kathleen, 2018. "Risk and performance of bonds sponsored by private equity firms," Journal of Banking & Finance, Elsevier, vol. 93(C), pages 41-53.

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