The Causes and Consequences of Private Equity Buyouts of Private Firms: Evidence from U.S. Corporate Tax Returns

Abstract

This paper uses corporate tax return data to study the determinants and consequences of private equity (PE) buyouts of U.S. private firms between 1995 and 2009. In contrast with prior evidence that PE acquirers target public firms facing overinvestment problems, we find that PE acquirers target private firms facing underinvestment problems due to financing constraints. We then provide evidence that PE buyouts create value through their real effects on private firms in two ways: by leading to operational turnarounds in struggling firms and by relaxing financing constraints that limit the exercise of growth options in healthier firms.