Investors and Firm Market Power: Does the Source of Capital Matter?
Saturday, Jan. 5, 2019 10:15 AM - 12:15 PM
- Chair: Heather Tookes, Yale University
Value Creation and Persistence in Private Equity
AbstractWe study how private equity (PE) firms generate returns for their investors, by estimating the effects of PE funding on portfolio companies’ operational efficiency and market power. We confirm prior findings that PE funding leads to operational efficiency: both labor productivity and total factor productivity improve as PE-backed companies ramp up investment, employment, and sales. We find no evidence that PE-backed companies increase their market power. In fact, the PE-backed companies in our sample reduce their price markups by 6%, which allows them to gain substantial market shares. Using detailed confidential information obtained from inside PE firms, we show that the PE firms in our sample push for operational improvements and that these improvements are the main drivers of the returns investors receive from PE funds. We find that the majority of the operational improvements instigated by PE firms persist even after they fully exit their investments. These findings are consistent with PE firms’ ability to create long-lasting value as opposed to maximizing short-term returns at the expense of portfolio companies.
Common Ownership Does Not Have Anti-Competitive Effects in the Airline Industry
AbstractInstitutional investors often own significant equity in multiple firms competing within the same product markets. A recent debate among legal and financial scholars questions whether competitors with "common owners" engage in anti-competitive behavior. This paper questions the applicability of the theory of horizontal mergers and cross-ownership theory in the context of common ownership, and empirically analyzes the relationship between ticket prices and common ownership in the airline industry. In sharp contrast to the findings in Azar, Schmalz, and Tecu (2017), we find no evidence of such a relationship.
- G3 - Corporate Finance and Governance