Private Equity Funds and Firm Products

42 Pages Posted: 4 Feb 2018

See all articles by Wenhao Yang

Wenhao Yang

Chinese University of Hong Kong, Shenzhen

Feng Zhang

University of Utah - Department of Finance

Date Written: January 2018

Abstract

We examine whether and how private equity funds affect the target firm’s product development after a leveraged buyout. Employing a novel and comprehensive dataset of announcements of new products, we find that the target firm significantly reduces the number of new product announcements after the buyout compared to its product market competitors. Additional tests suggest that some private equity funds cut the target firm’s investment on product innovation to boost its short-term earnings at the cost of its long-term performance, and other private equity funds cut the investment on new products to reduce agency costs. In contrast, the results are inconsistent with that private equity funds select target firms that they anticipate to announce fewer new products in the future regardless of whether the leveraged buyout occurs. The results are consistent with that private equity funds decelerate the target firm’s product development after the leveraged buyout to boost its short-term earnings or to reduce its agency costs.

Keywords: private equity funds, new products, leveraged buyouts

JEL Classification: G34, G23, L11

Suggested Citation

Yang, Wenhao and Zhang, Feng, Private Equity Funds and Firm Products (January 2018). Available at SSRN: https://ssrn.com/abstract=3110824 or http://dx.doi.org/10.2139/ssrn.3110824

Wenhao Yang

Chinese University of Hong Kong, Shenzhen ( email )

2001 Longxiang Road, Longgang District
Shenzhen, 518172
China

Feng Zhang (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112-9303
United States

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