The Operational Consequences of Private Equity Buyouts: Evidence from the Restaurant Industry

49 Pages Posted: 8 Oct 2013 Last revised: 13 Jan 2014

See all articles by Shai Bernstein

Shai Bernstein

Stanford Graduate School of Business

Albert Sheen

University of Oregon - Department of Finance

Date Written: December 8, 2013

Abstract

Do private equity buyouts disrupt company operations to maximize short-term goals? We document significant operational changes in 103 restaurant chain buyouts between 2002 and 2012 using health inspection records for over 50,000 stores in Florida. Store-level operational practices improve after private equity buyout, as restaurants become cleaner, safer, and better maintained. Supporting a causal interpretation, this effect is stronger in chain-owned stores than in franchised locations -- “twin restaurants” over which private equity owners have limited control. Private equity targets also reduce employee headcount, lower menu prices, and experience a lower likelihood of store closures -- a proxy for poor financial performance. These changes to store-level operations require monitoring, training, and better alignment of worker incentives, suggesting PE firms improve management practices throughout the organization.

Keywords: Private Equity, Management Practices, Operational Performance, Restaurant Industry, Franchisees

JEL Classification: G24, G34, J24, J28, M11, M54

Suggested Citation

Bernstein, Shai and Sheen, Albert, The Operational Consequences of Private Equity Buyouts: Evidence from the Restaurant Industry (December 8, 2013). Rock Center for Corporate Governance at Stanford University Working Paper No. 156. Available at SSRN: https://ssrn.com/abstract=2336672 or http://dx.doi.org/10.2139/ssrn.2336672

Shai Bernstein (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Albert Sheen

University of Oregon - Department of Finance ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

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