Are Private Equity Investors Boon or Bane for an Economy? - A Theoretical Analysis

28 Pages Posted: 29 Jan 2013

See all articles by Sebastian Ernst

Sebastian Ernst

affiliation not provided to SSRN

Christian Koziol

University of Mannheim - Department of Business Administration and Finance

Denis Schweizer

Concordia University

Date Written: January 2013

Abstract

In this paper, we provide a theoretical foundation for the controversial debate on the investment behaviour of private equity investors. We separately consider six major characteristics that typically distinguish private equity investors from standard investors. Applying a simple model framework, we compare both the maximum acquisition prices paid by private equity and standard investors for the takeover of a target firm, as well as the subsequent optimal investment volumes. This analysis intends to uncover why private equity investors do (or do not) acquire a company even though they later invest less than standard investors would. We find that most of the usual arguments against private equity transactions, such as higher target return, short‐term investment perspective, lower risk aversion, and operational improvements, cannot explain lower investment volume following a successful takeover by private equity firms, in contrast to other arguments, such as high level of leverage and informational advantages.

Keywords: private equity, leveraged buyout (LBO), takeover competition, investment strategy

JEL Classification: D40, D61, G34

Suggested Citation

Ernst, Sebastian and Koziol, Christian and Schweizer, Denis, Are Private Equity Investors Boon or Bane for an Economy? - A Theoretical Analysis (January 2013). European Financial Management, Vol. 19, Issue 1, pp. 180-207, 2013. Available at SSRN: https://ssrn.com/abstract=2208338 or http://dx.doi.org/10.1111/j.1468-036X.2012.00586.x

Sebastian Ernst (Contact Author)

affiliation not provided to SSRN

Christian Koziol

University of Mannheim - Department of Business Administration and Finance ( email )

D-68131 Mannheim
Germany
(0621) 181-1519 (Fax)

Denis Schweizer

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada
+1 (514) 848-2424 ext. 2926 (Phone)
+1 (514) 848-4500 (Fax)

HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

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