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

Management Science, Forthcoming

45 Pages Posted: 15 Mar 2011 Last revised: 11 Jun 2013

Jarrad Harford

University of Washington

Adam C. Kolasinski

Texas A&M, Mays School of Business

Date Written: June 5, 2013

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. Yet, 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 post-transaction 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.

Keywords: private equity, leveraged buyouts, disclosure policy, investment policy

JEL Classification: G31, G32, G34, L14

Suggested Citation

Harford, Jarrad and Kolasinski, Adam C., Do Private Equity Sponsor Returns Result from Wealth Transfers and Short-Termism? Evidence from a Comprehensive Sample of Large Buyouts and Exit Outcomes (June 5, 2013). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1785927 or http://dx.doi.org/10.2139/ssrn.1785927

Jarrad Harford

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)

HOME PAGE: http://faculty.washington.edu/jarrad/

Adam C. Kolasinski (Contact Author)

Texas A&M, Mays School of Business ( email )

360 Wehner
College Station, TX 77843-4218
United States

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