Hostname: page-component-cd9895bd7-dk4vv Total loading time: 0 Render date: 2024-12-25T07:47:01.582Z Has data issue: false hasContentIssue false

Cross-Border LBOs, Human Capital, and Proximity: Value Addition through Monitoring in Private Equity Investments

Published online by Cambridge University Press:  12 February 2020

Thomas J. Chemmanur*
Affiliation:
Chemmanur, [email protected], Boston College Carroll School of Management
Tyler J. Hull
Affiliation:
Hull, [email protected], University of Massachusetts Boston College of Management
Karthik Krishnan
Affiliation:
Krishnan, [email protected], Northeastern University College of Business
*
Chemmanur (corresponding author), [email protected]

Abstract

We show that cross-border leveraged buyout investments involving U.S. rather than non-U.S. private equity (PE) investors are more likely to have a successful exit (initial public offering or acquisition). Exogenous increases in effective proximity following the signing of “open sky agreements” between the United States and target firms’ home countries increases both the propensity of U.S. PE firms to invest in these firms and the value addition by these investors. We show that such increases in value addition by U.S. PE investors following proximity increases are at least partially due to better monitoring, facilitated by the more efficient allocation of experienced U.S. PE managers to cross-border deals.

Type
Research Article
Copyright
© Michael G. Foster School of Business, University of Washington 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

An earlier version of this paper was circulated under the title “Cross-Border LBOs, Human Capital, and Proximity: Evidence from a Natural Experiment.” We thank seminar participants at the Vanderbilt Conference on Private Equity, 2nd SUNY Albany PE Conference, Argentum Private Equity Conference, Financial Management Association Annual Meetings, European Finance Association Annual Meetings, and at Boston College, Northeastern University, NHH (The Norwegian School of Economics), and BI (Bedriftøkonomisk Institutt) Norwegian Business School. We also thank Rajesh Agarwal, Onur Bayar, Na Dai, Xavier Giroud, Jayant Kale, Laura Lindsey, Alexander Ljungqvist, Robert Taggart, Hassan Tehranian, Xuan Tian, and Boris Valee for helpful comments. We thank Mergermarket Ltd. for providing data on private equity exits and private equity managers. Chemmanur acknowledges financial support from a Hillenbrand Distinguished Fellowship. Hull thanks the Finansmarkedsfondet and the Argentum Private Equity Center for their generous research support. Any errors or omissions remain our responsibility.

References

Angrist, J. D., and Pischke, J.. Mostly Harmless Econometrics: An Empiricist’s Companion. Princeton, NJ: Princeton University Press (2009).Google Scholar
Axelson, U.; Jenkinson, T.; Strömberg, P.; and Weisbach, M. S.. “Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts.” Journal of Finance, 68 (2013), 22232267.CrossRefGoogle Scholar
Axelson, U.; Strömberg, P.; and Weisbach, M. S.. “Why Are Buyouts Levered? The Financial Structure of Private Equity Funds.” Journal of Finance, 64 (2009), 15491582.Google Scholar
Bayar, O., and Chemmanur, T. J.. “IPOs versus Acquisitions and the Valuation Premium Puzzle: A Theory of Exit Choice by Entrepreneurs and Venture Capitalists.” Journal of Financial and Quantitative Analysis, 46 (2011), 17551793.CrossRefGoogle Scholar
Bergstrom, C.; Grubb, M.; and Jonsson, S.. “The Operating Impact of Buyouts in Sweden: A Study of Value Creation.” Journal of Private Equity, 11 (2007), 2239.CrossRefGoogle Scholar
Bernstein, S.; Giroud, X.; and Townsend, R.. “The Impact of Venture Capital Monitoring: Evidence from a Natural Experiment.” Journal of Finance, 71 (2016), 15911622.Google Scholar
Bernstein, S.; Lerner, J.; Sørensen, M.; and Strömberg, P.. “Private Equity and Industry Performance.” Management Science, 63 (2016), 11981213.CrossRefGoogle Scholar
Bernstein, S., and Sheen, A.. “The Operational Consequences of Private Equity Buyouts: Evidence from the Restaurant Industry.” Review of Financial Studies, 29 (2016), 23872418.CrossRefGoogle Scholar
Bertrand, M.; Duflo, E.; and Mullainathan, S.. “How Much Should We Trust Differences-in-Differences Estimates?Quarterly Journal of Economics, 119 (2004), 249275.CrossRefGoogle Scholar
Boucly, Q.; Sraer, D.; and Thesmar, D.. “Growth LBOs.” Journal of Financial Economics, 102 (2011), 432453.CrossRefGoogle Scholar
Bright, C. L., and Roberts, H.. “Is the Management Team Right?” Working Paper, Spencer Stuart (2011).Google Scholar
Chemmanur, T. J.; He, J.; He, S.; and Nandy, D.. “Product Market Characteristics and the Choice Between IPOs and Acquisitions.” Journal of Financial and Quantitative Analysis, 53 (2018), 681721.CrossRefGoogle Scholar
Chemmanur, T. J.; Hull, T. J.; and Krishnan, K.. “Do Local and International Venture Capitalists Play Well Together? The Complementarity of Local and International Venture Capitalists.” Journal of Business Venturing, 31 (2016), 573594.CrossRefGoogle Scholar
Chemmanur, T. J.; Krishnan, K.; and Nandy, D.. “How Does Venture Capital Financing Improve Efficiency in Private Firms? A Look Beneath the Surface.” Review of Financial Studies, 24 (2011), 40374090.CrossRefGoogle Scholar
Chung, J.; Sensoy, B. A.; Stern, L.; and Weisbach, M. S.. “Pay for Performance from Future Fund Flows: The Case of Private Equity.” Review of Financial Studies, 25 (2012), 32593304.CrossRefGoogle Scholar
Cohn, J.; Mills, L.; and Towery, E.. “The Evolution of Capital Structure and Operating Performance after Leveraged Buyouts: Evidence from U.S. Corporate Tax Returns.” Journal of Financial Economics, 111 (2014), 469494.CrossRefGoogle Scholar
Cotter, J. F., and Peck, S. W.. “The Structure of Debt and Active Equity Investors: The Case of the Buyout Specialist.” Journal of Financial Economics, 59 (2001), 101147.Google Scholar
Davis, S.; Haltiwanger, J. C.; Handley, K.; Jarmin, R. S.; Lerner, J.; and Miranda, J.. “Private Equity, Jobs, and Productivity.” American Economic Review, 104 (2014), 39563990.Google Scholar
Demiroglu, C., and James, C. M.. “The Role of Private Equity Group Reputation in LBO Financing.” Journal of Financial Economics, 96 (2010), 306330.CrossRefGoogle Scholar
Edgerton, J.Agency Problems in Public Firms: Evidence from Corporate Jets in Leveraged Buyouts.” Journal of Finance, 67 (2012), 21872213.Google Scholar
Giroud, X.Proximity and Investment: Evidence from Plant-Level Data.” Quarterly Journal of Economics, 128 (2013), 861915.Google Scholar
Gompers, P.; Kaplan, S.; and Mukharlyamov, V.. “What Do Private Equity Firms (Say They) Do?Journal of Financial Economics, 121 (2016), 449476.CrossRefGoogle Scholar
Guo, S.; Hotchkiss, E. S.; and Song, W.. “Do Buyouts (Still) Create Value?Journal of Finance, 66 (2011), 479517.CrossRefGoogle Scholar
Harford, J., and Kolasinski, A. C.. “Do Private Equity Returns Result from Wealth Transfers and Short-Termism? Evidence from a Comprehensive Sample of Large Buyouts.” Management Science, 60 (2014), 888902.CrossRefGoogle Scholar
Humphrey-Jenner, M.Private Equity Fund Size, Investment Size, and Value Creation.” Review of Finance, 16 (2012), 799835.CrossRefGoogle Scholar
Kaplan, S.The Effects of Management Buyouts on Operating Performance and Value.” Journal of Financial Economics, 24 (1989), 217254.Google Scholar
Kaplan, S., and Schoar, A.. “Private Equity Performance: Returns, Persistence and Capital Flows.” Journal of Finance, 60 (2005), 17911823.CrossRefGoogle Scholar
Kaplan, S., and Strömberg, P.. “Leveraged Buyouts and Private Equity.” Journal of Economic Perspectives, 23 (2008), 121146.CrossRefGoogle Scholar
Karolyi, A., and Liao, R.. “State Capitalism’s Global Reach: Evidence from Foreign Acquisitions by Sovereign Acquirers.” Journal of Corporate Finance, 42 (2017), 367391.CrossRefGoogle Scholar
Karolyi, A., and Taboada, A.. “Regulatory Arbitrage and Cross-Border Bank Acquisitions.” Journal of Finance, 70 (2015), 23952450.CrossRefGoogle Scholar
Lerner, J.; Sørensen, M.; and Strömberg, P.. “Private Equity and Long-Run Investment: The Case of Innovation.” Journal of Finance, 66 (2011), 445477.CrossRefGoogle Scholar
Lichtenberg, F., and Siegel, D.. “The Effects of Leveraged Buyouts on Productivity and Related Aspects of Firm Behavior.” Journal of Financial Economics, 27 (1990), 165194.CrossRefGoogle Scholar
Marquez, R.; Nanda, V.; and Yavuz, M. D.. “Private Equity Fund Returns and Performance Persistence.” Review of Finance, 19 (2015), 17831823.CrossRefGoogle Scholar
Metrick, A., and Yasuda, A.. “The Economics of Private Equity Funds.” Review of Financial Studies, 23 (2010), 23032341.CrossRefGoogle Scholar
PitchBook, PE and VC Fundraising Report (2017).Google Scholar
Poulsen, A. B., and Stegemoller, M.. “Moving from Private to Public Ownership: Selling Out to Public Firms versus Initial Public Offerings.” Financial Management, 37 (2008), 81101.CrossRefGoogle Scholar
Puri, M., and Zarutskie, R.. “On the Life Cycle Dynamics of Venture-Capital and Non-Venture-Capital-Financed Firms.” Journal of Finance, 67 (2012), 22472293.CrossRefGoogle Scholar
Roberts, M. R., and Whited, T. M.. “Endogeneity in Empirical Corporate Finance.” In Handbook of the Economics of Finance, Vol. 2, Constantinides, G. M., Harris, M., and Stulz, R. M., eds. Amsterdam, Netherlands: Elsevier (2013), 493572.CrossRefGoogle Scholar
Robinson, D. T., and Sensoy, B. A.. “The Role of Private Equity Group Reputation in LBO Financing.” Review of Financial Studies, 26 (2013), 27602797.CrossRefGoogle Scholar
Smith, A. J.Corporate Ownership Structure and Performance: The Case of Management Buyouts.” Journal of Financial Economics, 27 (1990), 143164.Google Scholar
Sørensen, M.How Smart Is Smart Money? An Empirical Two-Sided Matching Model of Venture Capital.” Journal of Finance, 62 (2007), 27252762.Google Scholar
Sørensen, M.; Wang, N.; and Yang, J.. “Valuing Private Equity.” Review of Financial Studies, 27 (2014), 19772021.CrossRefGoogle Scholar
Strömberg, P.The New Demography of Private Equity.” In Globalization of Alternative Investments Working Papers Vol. 1: Global Economic 24 Impact of Private Equity, Gurung, A. and Lerner, J., eds. New York: World Economic Forum USA (2008), 326. Available at http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.694.9415&rep=rep1&type=pdf.Google Scholar
Tian, X.The Causes and Consequences of Venture Capital Stage Financing.” Journal of Financial Economics, 101 (2011), 132159.CrossRefGoogle Scholar
Supplementary material: File

Chemmanur et al. supplementary material

Chemmanur et al. supplementary material

Download Chemmanur et al. supplementary material(File)
File 249.8 KB