Sunday, January 6, 2019
Antitrust law and economics scholars don't pay enough attention to literatures outside of law and economics (finance, management, information systems, supply chain management, marketing). This much was clear from the FTC hearings, where a number of panelists from practice (and some from the legal academy) made uninformed points about mergers and conduct where there is a significant extant literature across fields. One new working paper should raise some concern regarding private equity acquisitions. See below.
Douglas J. Cumming, Florida Atlantic University, Rejo Peter, York University - Schulich School of Business, Monika Tarsalewska, University of Exeter Business School, identify issues in Public-to-Private Buyouts and Innovation.
Abstract: We study the effect of public-to-private buyout transactions on investments in innovation using an international sample from thirty-six countries over the 1997-2017 period. We use patent counts and citations to proxy for the quantity, quality, and economic importance of innovation. Our results are based on time analysis and matched sample regressions. The data indicate that buyouts are associated with a significant reduction in patents and patent citations, including a reduction of radical (i.e., more scientific) patents. When we split the sample into institutional and management buyouts, the negative effect of buyouts is confirmed only for institutional buyouts, suggesting that highly leveraged transactions prevent target firms from adopting long-term investments. This finding is confirmed by reductions in innovator employment and innovation efficiency subsequent to going private. Moreover, the data indicate that the negative effect is mostly prevalent for transactions where the cost of the deal’s debt financing is higher than the post-buyout cost of the debt. For deals financed only with private equity, this effect is aggravated in the post-2006 period, suggesting that the nature of deals has worsened innovation over time. We rule out alternative explanations for these findings, including but not limited to outliers, truncation bias, and endogeneity.