Abstract
Recent research on productivity finds that best management practices are a crucial but neglected element in explaining firm productivity. This stream of research also focuses on why a large number of firms may not implement best management practices despite their apparent benefits. In this paper, we examine the adoption of best management practices in small leveraged buyout (LBO) firms. Our choice of small LBO is motivated by the fact that these firms undergo extensive restructuring and, therefore, there is an opportunity to study the adoption process of best management practices. The findings show that buyout companies introduce best management practices (operations, monitoring, targets and incentive-related practices) at different stages of their development, and more importantly, these practices evolve in response to changes in various firm-level characteristics. For example, companies emphasizing cost leadership tend to follow targets and monitoring related practices while firms following a differentiation strategy are more likely to implement incentives and operations related management practices. Buyout sponsors’ board representatives and new CEO also play a critical role in the adoption of these best management practices which are linked to superior firm performance, measured as growth in revenues, productivity and return on assets.
Highlights
Firms use management practices to direct, support and motivate individuals to perform their specific organizational roles
We focus on leveraged buyout (LBO) firms because their practices are subject to change as the new owners of the firms will likely to have an overt interest in implementing various performance improvement measures over the medium to longterm period
To measure the impact of investor involvement in ‘best management practice’ adoption, we examine whether buyout investors are part of the company’s board of directors
Summary
Firms use management practices to direct, support and motivate individuals to perform their specific organizational roles. Bloom and Van Reenen (2007) and Bloom et al (2011) examined the role of product market competition, among other factors, in determining the degree to which best management practices are adopted by firms in the United States, Britain, Germany, and France. The reverse is true, and it is likely that the firm will not fully enjoy the fruits of productivity This suggests that when we conceptualize best management practices, we must contemplate the possibility that a firm is endowed with good practices as well as bad practices and that there is an evolutionary process involved in selecting best management practices. These ideas are best supported by the evolutionary and behavioral frameworks of Nelson and Winter (1982) and Cyert and March (1963)
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