The (Heterogenous) Economic Effects of Private Equity Buyouts
The effects of private equity buyouts on employment, productivity, and job reallocation vary tremendously with macroeconomic and credit conditions, across private equity groups, and by type of buyout. We reach this conclusion by examining the most extensive database of U.S. buyouts ever compiled, encompassing thousands of buyout targets from 1980 to 2013 and millions of control firms. Employment shrinks 13% over two years after buyouts of publicly listed firms – on average, and relative to control firms – but expands 13% after buyouts of privately held firms. Post-buyout productivity gains at target firms are large on average and much larger yet for deals executed amidst tight credit conditions. A post-buyout tightening of credit conditions or slowing of GDP growth curtails employment growth and intra-firm job reallocation at target firms. We also show that buyout effects differ across the private equity groups that sponsor buyouts, and these differences persist over time at the group level. Rapid upscaling in deal flow at the group level brings lower employment growth at target firms.
Davis, Haltiwanger, Handley, and Lerner are affiliates of the National Bureau of Economic Research. Haltiwanger was also a part-time Schedule A employee and Javier Miranda was an employee at the U.S. Census Bureau during the preparation of this paper. We thank Edie Hotchkiss (discussant), Ron Jarmin, Steve Kaplan, Ann Leamon, Antoinette Schoar (discussant), and Kirk White for helpful comments, as well as seminar participants at the 2019 American Economic Association annual meeting, Carnegie-Mellon University, Georgia Tech, Harvard Law School, the Hoover Institution, Michigan Ross, MIT, the NBER Productivity Lunch Group, and the 2020 Western Finance Association meetings. We thank Christine Rivera, Kathleen Ryan and James Zeitler of Harvard Business School’s Baker Library for their assistance, as well as Andrea Barreto, Franko Jira, Cameron Khansarinia, Ayomide Opeyemi, Steven Moon, and Yuan Sun. Special thanks are due to Francisca Rebelo for her help with revisions. Per Stromberg generously gave permission to use older transaction data collected as part of a World Economic Forum project. We thank the Harvard Business School’s Division of Research, the Private Capital Research Institute, the Ewing Marion Kauffman Foundation, and especially the Smith Richardson Foundation for generous research support. Opinions and conclusions expressed herein are the authors and do not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to ensure that no confidential information is disclosed (DRB-B0109-CDAR-2018718, DRB-B0110- CDAR-2018-0718, DRB-B0020-CED-20181128, DRB-B0018-CED-20181126, CBDRB-FY19- CMS-8034, and CBDRB-FY21-CED006-0017). Lerner has advised institutional investors in private equity funds, private equity groups, and governments designing policies relevant to private equity. Davis has served as an expert witness in a legal dispute between private equity firms. All errors and omissions are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Steven J. Davis
I own more than $5,000 in stock of Charles River Associates. I own Millennium Economics LLC.