Competitive Effects on Private Equity Investments

Wednesday June 1, 2011
  • Working Paper

In this paper we show that companies receiving private equity (PE) investments outperform their rivals, and we analyze the reasons for this outperformance. Specifically, we find that competitors experience a decrease in their stock price and operating performance around a rival’s PE investment, whereas the withdrawal of a previously announced PE investment leads to the opposite outcome (an increase in competitors’ stock prices). We identify the underlying sources for the decrease in competitiveness by analyzing the cross sectional differences in competitors’ performance. We further find that PE specialization, corporate governance, technological innovation, managerial incentives, and operating efficiency are related to performance differences among competitors at the time of a PE investment. Our results are robust to the inclusion of additional control variables and to a number of alternative explanations. Taken together, our findings support the view that performance differences are driven, at least in part, by the advantages conferred by PE investors.