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 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 in 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. This suggests that only institutional buyouts 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 most prevalent for transactions where the cost of the deal’s debt financing is higher than that of the debt post-buyout. We rule out some alternative explanations for these findings, including but not limited to outliers, truncation bias, and endogeneity.