Competitive Effects of Private Equity Investments

Abstract

We analyze why companies that receive private equity investments outperform their rivals. We show that rivals experience a decrease in their stock prices and their operating performance around private equity (PE) investments in their industry. Furthermore, we show that the withdrawal of a previously announced PE investment leads to the exact opposite outcome: Competitors’ stock prices increase in this case. We demonstrate that firms without private equity investments experience a relative decrease in performance, and we identify the underlying sources for the decrease in competitiveness by analyzing the cross-sectional differences in competitors’ performance. We find that the level of specialization, corporate governance, technological innovation, managerial incentives, and efficiency are all related to performance differences among competitors at the time of the PE investment. Taken together, our findings support the hypothesis that performance differences are driven, at least in part, by the advantages by PE investors.

Keywords: Private Equity, Competitive Effects

JEL Classification: G34, G32, G23