Cross-Border Private Equity and Valuation Effects

Abstract

In this paper, I propose a theory that connects a Private Equity (PE) fund's valuation, a PE fund manager's expected ability and the likelihood of cross-border acquisitions. Using a model of costly-state verification, I show that an increase in a PE fund's valuation driven by economy-wide improvements raises the likelihood of a cross-border leveraged buyout (LBO) compared to a domestic LBO. Consistent with the model's key prediction, I find empirically that an increase in a PE fund's valuation, which captures the fund manager's expected ability, is associated with higher probability of cross-border acquisitions. The empirical estimates indicate a one-standard deviation increase in valuations, equivalent to approximately 5.2 percent of a fund's size, leads to at least an 11.9 percent increase in the predicted number of cross-border buyout deals compared to domestic LBOs.