Abstract
We study whether Private Equity sponsors are long-term oriented with their Leveraged Buyout (LBO) European targets after the euro-crisis. Their reputational constraints could incentivize them to value capture rather than value creation. Since LBOs are highly levered and LBO sponsors intervene in the corporate governance (CG), their orientation is measured by looking at how CG mechanisms affect portfolio companies’ Risk of Financial Distress (RFD). We find that LBO sponsors make a better use of CG mechanisms to mitigate RFD than other forms of ownership; however, results do not allow to exclude value capture.References
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Barney, J. (1991). Firm Resources and Sustained Competitive Advantage. Journal of Management, 17(1), 99-120, https://doi.org/10.1177/014920639101700108
Berg, A., & Gottschalg, O. (2005). Understanding Value Generation in Buyouts. Journal of Restructuring Finance, 2(1), 9-37, https://doi.org/10.1142/S0219869X05000221
Achleitner, A-K., Betzer, A., Goergen, M., & Hinterramskogler, B. (2013). Private Equity Acquisitions of Continental European Firms: the Impact of Ownership and Control on the Likelihood of Being Taken Private. European Financial Management, 19(1), 72-107, http://dx.doi.org/10.1002/eufm.569
Achleitner, A-K., Betzer, A., & Gider, J. (2010). Do corporate governance Motives Drive Hedge Fund and Private Equity Fund Activities? European Financial Management, 16(5), 805-828, https://doi.org/10.1111/j.1468-036X.2010.00557.x
Allen, J., & Phillips, G. (2000). Corporate Equity Ownership, Strategic Alliances, and Product Market Relationships. The Journal of Finance, 55(6), 2791-2815, https://doi.org/10.1111/0022-1082.00307
Andrade, G., & Kaplan, S. (1998). How Costly is Financial (not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed. The Journal of Finance, 53(5), 1443-1493, https://doi.org/10.1111/00221082.00062
Altman, E. (2014). Distressed Firm and Bankruptcy prediction in an international context: a review and empirical analysis of Altman’s Z-Score Model, working paper
Altman, E. (1968). Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy. Journal of Finance, (September), 589-609, https://doi.org/10.1111/j.1540-6261.1968.tb00843.x
Bain & Company Inc. (2018). Global Private Equity Report 2018. Business Insights.
Barton, D. (2011). Capitalism for the long-term. Harvard Business Review, 89(3), 84-91, Available at: https://hbr.org/2011/03/capitalism-for-the-long-term
Barton, D., & Wiseman, M. (2015). Where boards fall short. Harvard Business Review, 93(1-2), 98-104, Available at: https://hbr.org/2015/01/where-boards-fallshort
Braun, M., & Latham, S. (2007). The governance of going private transactions: The leveraged buyout board of directors as a distinctive source of value. Management Decision, 45(5), 866-882, https://doi.org/10.1108/0025174071075 3684
Braun, R., Jenkinson, T., & Stoff, I. (2015). How Persistent is Private Equity Performance? Evidence from Deal-level Data. Journal of Financial Economics, 123(2), 273-291, https://doi.org/10.1016/j.jfineco.2016.01.033
Buchner, A., Mohamed, A., & Schwienbacher, A. (2016). Does risk explain persistence in private equity performance? Journal of Corporate Finance, 39(3), 18-35, https://doi.org/10.1111/j.1540-6261.2005.00780.x
Cornelli, F., & Karakaş O., (2008). Private Equity and corporate governance: Do LBOs Have More Effective Boards? World Economic Forum
Cotter, J.F., & Peck, S.W. (2001). The Structure of Debt and Active Equity Investors: The Case of The Buyout Specialist. Journal of Financial Economics, 59(1), 101-147, https://doi.org/10.1016/S0304-405X(00)00083-0
Cressy, R., Munari, F., & Malipiero, A. (2007). Playing to their strengths? Evidence that Specialization in the Private Equity Industry Confers Competitive Advantage. Journal of Corporate Finance, 13(4), 647-669, https://doi.org/10.1016/j.jcorpfin.2007.04.007
Cumming, D., Siegel, D., & Wright, M. (2007). Private Equity, Leveraged Buyouts and Governance. Journal of Corporate Finance, 13(4), 439-460, https://doi.org/10.1016/j.jcorpfin.2007.04.008
Ernst & Young (2018). 2017 Global Private Equity Survey, EY Publications.
Fulmer, I., & Ployhart, R. (2014). Our Most Important Asset: A Multidisciplinary/Multilevel Review of Human Capital Valuation for Research and Practice. Journal of Management, 40(1), 161-192, https://doi.org/10.1177/0149206313511271
Harford, J., & Kolasinski, A. (2013). Do private equity returns result from wealth transfers and short-termism? Evidence from a Comprehensive Sample of Large Buyouts. Management Science, 60(4), 888-902, http://dx.doi.org/10.2139/ssrn.1785927
Hoskisson, R.E., Shi, W., Yi, X., & Jin, J. (2013). The Evolution and Strategic Positioning of Private Equity Firms. Academy of Management Perspectives, 27(1), 22-38, http://dx.doi.org/10.5465/amp.2012.0131
Hotchkiss, E.S., Strömberg, P., & Smith, D.C. (2014). Private Equity and the Resolution of Financial Distress. Working paper, Stockholm School of Economics
Jensen, M.C. (1989). Eclipse of the Public Corporation. Harvard Business Review, 67(5), 61-74, http://dx.doi.org/10.2139/ssrn.146149
Jensen, M.C., & Meckling, W.H. (1976). Theory of the firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(October), 305-360, https://dx.doi.org/10.2139/ssrn.94043
Kaplan, S., & Schoar, A. (2005). Private Equity Performance: Returns, Persistence, and Capital Flows. The Journal of Finance, 60(4), 1791-1823, https://doi.org/10.1111/j.1540-6261.2005.00780.x
Kaplan, S., & Strömberg, P. (2009). Leveraged Buyouts and Private Equity. Journal of Economic Perspectives, 23(1), 121-146, https://dx.doi.org/10.2139/ssrn.1194962
Klein, P.G., Chapman, J.L., & Mondelli, M.P. (2013). Private equity and Entrepreneurial Governance: Time for a balanced view. The Academy of Management Perspectives, 27(1), 39-51, https://doi.org/10.5465/amp.2012.0132
Lerner, J., Sorensen, M., & Strömberg, P. (2011). Private Equity and Long-Run Investment: The Case of Innovation. The Journal of Finance, 66(2), 445-477, https://doi.org/10.1111/j.1540-6261.2010.01639.x
Meuleman, M., Wilson, N., Wright, M., & Neckebrouck, J. (2014). Entrepreneurial Buyouts and Financial Distress: A Multiple Agency Perspective. Frontiers of Entrepreneurship Research, 34(2), 80-94, Available at: http://digitalkn
owledge.babson.edu/fer/vol34/iss2/5
Millson, R., & Ward, M. (2005). Corporate Governance Criteria as Applied in Private Equity Investments. South African Journal of Business Management, 36(1), 73-85, Available at: https://hdl.handle.net/10520/EJC22271
Nikoskelainen, E., & Wright, M. (2007). The Impact of corporate governance Mechanisms on Value Increase in Leveraged Buyouts. Journal of Corporate Finance, 13(4), 511-537, https://doi.org/10.1016/j.jcorpfin.2007.04.002
Nordström, L. (2015). A Long-Term Perspective on Private Equity Ownership. Ratio Working Paper No. 269, https://dx.doi.org/10.2139/ssrn.877233
Nyberg, A., Moliterno, T., Hale, D., & Lepak, D. (2014). Resource-Based Perspectives on Unit-Level Human Capital: A Review and Integration. Journal of Management, 40(1), 316-346, https://doi.org/10.1177%2F0149206312458703
Preqin (2018). 2018. Preqin Global Private Equity & Venture Capital Report. Reports.
Rosenbaum, P. (1993). Hodges-Lehmann Point Estimates of Treatment Effect in Observational Studies. Journal of the American Statistical Association, 88(424), 1250-1253, http://dx.doi.org/10.1080/01621459.1993.10476405
Rosenbaum, P., & Rubin, D. (1983). The Central Role of the Propensity Score in Observational Studies for Causal Effects. Biometrika, 70(1), 41-55, https://doi.org/10.1093/biomet/70.1.41
Scellato, G., & Ughetto, E. (2013). Real Effects of Private Equity Investments: Evidence from European buyouts. Journal of Business Research, 66(12), 2642-2649, https://doi.org/10.1016/j.jbusres.2012.06.001
Siegel, D., Wright, M., & Filatotchev I., (2011). Private Equity, LBOs, and Corporate Governance: International Evidence. Corporate Governance: an International Review, 19(3), 185-194, https://doi.org/10.1111/j.14678683.2010.00842.x
Sudarsanam, S., Wright, M., & Huang, J. (2011). Target Bankruptcy Risk and its Impact on Going Private Buyout Performance and Exit. Corporate governance: An International Review, 19(3), 240-258, https://doi.org/10.1111/j.1467-8683.2011.00854.x
Thornhill, S., & Amit, R. (2003). Learning About Failure: Bankruptcy, Firm Age, and the Resource-Based View. Organization Science, 14(5), 497-509, https://doi.org/10.1287/orsc.14.5.497.16761
Tykvová, T., & Borell, M. (2012). Do Private Equity Owners Increase Risk of Financial Distress and Bankruptcy? Journal of Corporate Finance, 18(1), 138-150, https://doi.org/10.1016/j.jcorpfin.2011.11.004
Ughetto, E. (2010). Assessing the Contribution to Innovation of Private Equity Investors: a Study on European Buyouts. Research Policy, 39(1), 126-140, http://dx.doi.org/10.1016/j.respol.2009.11.009
Wilson, N., & Wright, M. (2013). Private Equity, Buy-outs and Insolvency Risk. Journal of Business Finance and Accounting, 40(7), 949-990, https://doi.org/10.1111/jbfa.12042
Wright, M., Amess, K., Weir, C., & Girma, S. (2009). Private Equity and corporate governance: Retrospect and Prospect. Corporate governance: An International Review, 17(3), 353-375, https://doi.org/10.1111/j.14678683.2009.00744.x
Wright, M., Gilligan, J., & Amess, K. (2009). The Economic Impact of Private Equity: What We Know and What We Would Like to Know. Venture Capital: an International Journal of Entrepreneurial Finance, 11(1), 1-21, https://doi.org/10.1080/13691060802151887
Barney, J. (1991). Firm Resources and Sustained Competitive Advantage. Journal of Management, 17(1), 99-120, https://doi.org/10.1177/014920639101700108
Berg, A., & Gottschalg, O. (2005). Understanding Value Generation in Buyouts. Journal of Restructuring Finance, 2(1), 9-37, https://doi.org/10.1142/S0219869X05000221
Achleitner, A-K., Betzer, A., Goergen, M., & Hinterramskogler, B. (2013). Private Equity Acquisitions of Continental European Firms: the Impact of Ownership and Control on the Likelihood of Being Taken Private. European Financial Management, 19(1), 72-107, http://dx.doi.org/10.1002/eufm.569
Achleitner, A-K., Betzer, A., & Gider, J. (2010). Do corporate governance Motives Drive Hedge Fund and Private Equity Fund Activities? European Financial Management, 16(5), 805-828, https://doi.org/10.1111/j.1468-036X.2010.00557.x
Allen, J., & Phillips, G. (2000). Corporate Equity Ownership, Strategic Alliances, and Product Market Relationships. The Journal of Finance, 55(6), 2791-2815, https://doi.org/10.1111/0022-1082.00307
Andrade, G., & Kaplan, S. (1998). How Costly is Financial (not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed. The Journal of Finance, 53(5), 1443-1493, https://doi.org/10.1111/00221082.00062
Altman, E. (2014). Distressed Firm and Bankruptcy prediction in an international context: a review and empirical analysis of Altman’s Z-Score Model, working paper
Altman, E. (1968). Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy. Journal of Finance, (September), 589-609, https://doi.org/10.1111/j.1540-6261.1968.tb00843.x
Bain & Company Inc. (2018). Global Private Equity Report 2018. Business Insights.
Barton, D. (2011). Capitalism for the long-term. Harvard Business Review, 89(3), 84-91, Available at: https://hbr.org/2011/03/capitalism-for-the-long-term
Barton, D., & Wiseman, M. (2015). Where boards fall short. Harvard Business Review, 93(1-2), 98-104, Available at: https://hbr.org/2015/01/where-boards-fallshort
Braun, M., & Latham, S. (2007). The governance of going private transactions: The leveraged buyout board of directors as a distinctive source of value. Management Decision, 45(5), 866-882, https://doi.org/10.1108/0025174071075 3684
Braun, R., Jenkinson, T., & Stoff, I. (2015). How Persistent is Private Equity Performance? Evidence from Deal-level Data. Journal of Financial Economics, 123(2), 273-291, https://doi.org/10.1016/j.jfineco.2016.01.033
Buchner, A., Mohamed, A., & Schwienbacher, A. (2016). Does risk explain persistence in private equity performance? Journal of Corporate Finance, 39(3), 18-35, https://doi.org/10.1111/j.1540-6261.2005.00780.x
Cornelli, F., & Karakaş O., (2008). Private Equity and corporate governance: Do LBOs Have More Effective Boards? World Economic Forum
Cotter, J.F., & Peck, S.W. (2001). The Structure of Debt and Active Equity Investors: The Case of The Buyout Specialist. Journal of Financial Economics, 59(1), 101-147, https://doi.org/10.1016/S0304-405X(00)00083-0
Cressy, R., Munari, F., & Malipiero, A. (2007). Playing to their strengths? Evidence that Specialization in the Private Equity Industry Confers Competitive Advantage. Journal of Corporate Finance, 13(4), 647-669, https://doi.org/10.1016/j.jcorpfin.2007.04.007
Cumming, D., Siegel, D., & Wright, M. (2007). Private Equity, Leveraged Buyouts and Governance. Journal of Corporate Finance, 13(4), 439-460, https://doi.org/10.1016/j.jcorpfin.2007.04.008
Ernst & Young (2018). 2017 Global Private Equity Survey, EY Publications.
Fulmer, I., & Ployhart, R. (2014). Our Most Important Asset: A Multidisciplinary/Multilevel Review of Human Capital Valuation for Research and Practice. Journal of Management, 40(1), 161-192, https://doi.org/10.1177/0149206313511271
Harford, J., & Kolasinski, A. (2013). Do private equity returns result from wealth transfers and short-termism? Evidence from a Comprehensive Sample of Large Buyouts. Management Science, 60(4), 888-902, http://dx.doi.org/10.2139/ssrn.1785927
Hoskisson, R.E., Shi, W., Yi, X., & Jin, J. (2013). The Evolution and Strategic Positioning of Private Equity Firms. Academy of Management Perspectives, 27(1), 22-38, http://dx.doi.org/10.5465/amp.2012.0131
Hotchkiss, E.S., Strömberg, P., & Smith, D.C. (2014). Private Equity and the Resolution of Financial Distress. Working paper, Stockholm School of Economics
Jensen, M.C. (1989). Eclipse of the Public Corporation. Harvard Business Review, 67(5), 61-74, http://dx.doi.org/10.2139/ssrn.146149
Jensen, M.C., & Meckling, W.H. (1976). Theory of the firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(October), 305-360, https://dx.doi.org/10.2139/ssrn.94043
Kaplan, S., & Schoar, A. (2005). Private Equity Performance: Returns, Persistence, and Capital Flows. The Journal of Finance, 60(4), 1791-1823, https://doi.org/10.1111/j.1540-6261.2005.00780.x
Kaplan, S., & Strömberg, P. (2009). Leveraged Buyouts and Private Equity. Journal of Economic Perspectives, 23(1), 121-146, https://dx.doi.org/10.2139/ssrn.1194962
Klein, P.G., Chapman, J.L., & Mondelli, M.P. (2013). Private equity and Entrepreneurial Governance: Time for a balanced view. The Academy of Management Perspectives, 27(1), 39-51, https://doi.org/10.5465/amp.2012.0132
Lerner, J., Sorensen, M., & Strömberg, P. (2011). Private Equity and Long-Run Investment: The Case of Innovation. The Journal of Finance, 66(2), 445-477, https://doi.org/10.1111/j.1540-6261.2010.01639.x
Meuleman, M., Wilson, N., Wright, M., & Neckebrouck, J. (2014). Entrepreneurial Buyouts and Financial Distress: A Multiple Agency Perspective. Frontiers of Entrepreneurship Research, 34(2), 80-94, Available at: http://digitalkn
owledge.babson.edu/fer/vol34/iss2/5
Millson, R., & Ward, M. (2005). Corporate Governance Criteria as Applied in Private Equity Investments. South African Journal of Business Management, 36(1), 73-85, Available at: https://hdl.handle.net/10520/EJC22271
Nikoskelainen, E., & Wright, M. (2007). The Impact of corporate governance Mechanisms on Value Increase in Leveraged Buyouts. Journal of Corporate Finance, 13(4), 511-537, https://doi.org/10.1016/j.jcorpfin.2007.04.002
Nordström, L. (2015). A Long-Term Perspective on Private Equity Ownership. Ratio Working Paper No. 269, https://dx.doi.org/10.2139/ssrn.877233
Nyberg, A., Moliterno, T., Hale, D., & Lepak, D. (2014). Resource-Based Perspectives on Unit-Level Human Capital: A Review and Integration. Journal of Management, 40(1), 316-346, https://doi.org/10.1177%2F0149206312458703
Preqin (2018). 2018. Preqin Global Private Equity & Venture Capital Report. Reports.
Rosenbaum, P. (1993). Hodges-Lehmann Point Estimates of Treatment Effect in Observational Studies. Journal of the American Statistical Association, 88(424), 1250-1253, http://dx.doi.org/10.1080/01621459.1993.10476405
Rosenbaum, P., & Rubin, D. (1983). The Central Role of the Propensity Score in Observational Studies for Causal Effects. Biometrika, 70(1), 41-55, https://doi.org/10.1093/biomet/70.1.41
Scellato, G., & Ughetto, E. (2013). Real Effects of Private Equity Investments: Evidence from European buyouts. Journal of Business Research, 66(12), 2642-2649, https://doi.org/10.1016/j.jbusres.2012.06.001
Siegel, D., Wright, M., & Filatotchev I., (2011). Private Equity, LBOs, and Corporate Governance: International Evidence. Corporate Governance: an International Review, 19(3), 185-194, https://doi.org/10.1111/j.14678683.2010.00842.x
Sudarsanam, S., Wright, M., & Huang, J. (2011). Target Bankruptcy Risk and its Impact on Going Private Buyout Performance and Exit. Corporate governance: An International Review, 19(3), 240-258, https://doi.org/10.1111/j.1467-8683.2011.00854.x
Thornhill, S., & Amit, R. (2003). Learning About Failure: Bankruptcy, Firm Age, and the Resource-Based View. Organization Science, 14(5), 497-509, https://doi.org/10.1287/orsc.14.5.497.16761
Tykvová, T., & Borell, M. (2012). Do Private Equity Owners Increase Risk of Financial Distress and Bankruptcy? Journal of Corporate Finance, 18(1), 138-150, https://doi.org/10.1016/j.jcorpfin.2011.11.004
Ughetto, E. (2010). Assessing the Contribution to Innovation of Private Equity Investors: a Study on European Buyouts. Research Policy, 39(1), 126-140, http://dx.doi.org/10.1016/j.respol.2009.11.009
Wilson, N., & Wright, M. (2013). Private Equity, Buy-outs and Insolvency Risk. Journal of Business Finance and Accounting, 40(7), 949-990, https://doi.org/10.1111/jbfa.12042
Wright, M., Amess, K., Weir, C., & Girma, S. (2009). Private Equity and corporate governance: Retrospect and Prospect. Corporate governance: An International Review, 17(3), 353-375, https://doi.org/10.1111/j.14678683.2009.00744.x
Wright, M., Gilligan, J., & Amess, K. (2009). The Economic Impact of Private Equity: What We Know and What We Would Like to Know. Venture Capital: an International Journal of Entrepreneurial Finance, 11(1), 1-21, https://doi.org/10.1080/13691060802151887
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