Bank Affiliation in Private Equity Firms: Distortions in Investment Selection

46 Pages Posted: 16 Dec 2012 Last revised: 14 Jan 2017

Yingdi Wang

California State University, Fullerton

Date Written: January 12, 2017

Abstract

Private equity firms that are affiliated with banks have become major players in the leveraged buyout (LBO) market, raising billions of dollars in funds. In this paper, I investigate value creation of these LBOs through operating performance, leverage, and pricing. I find that bank-affiliated LBOs fail to create operating performance gains, on average. Moreover, I find that targets of bank-affiliated and independent LBOs are systematically different. While I find no difference in operating performance gains between bank-affiliated and independent LBOs with matched target characteristics, all firms that share the target characteristics of bank-affiliated LBOs show worse post-buyout operating performance. Combined with no difference in leverage and deal pricing, the overall results suggest that bank affiliation negatively affects the economic benefit of LBOs due to differing objectives that result in distortions in investment selection.

Keywords: private equity, banks, leveraged buyout

JEL Classification: G23, G24, G34

Suggested Citation

Wang, Yingdi, Bank Affiliation in Private Equity Firms: Distortions in Investment Selection (January 12, 2017). Available at SSRN: https://ssrn.com/abstract=2189644 or http://dx.doi.org/10.2139/ssrn.2189644

Yingdi Wang (Contact Author)

California State University, Fullerton ( email )

800 N State College St
Fullerton, CA 92831
United States

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