Abstract
We examine the role of non-venture private equity firms in the market for divested assets, comparing targets bought by such firms to those bought by corporate acquirers. We argue that private equity firms are uniquely positioned to correct underinvestment problems in public corporations using high-powered incentives and better informed monitoring. We therefore predict that private equity firms will systematically target non-core divisions of public corporations, as well as divisions of corporations that have limited long-term investments and show evidence of governance problems. Results from a sample of 1676 divestments confirm these predictions. Our study contributes to a better understanding of private equity buyouts, highlighting the competitive advantage of private equity as an alternate governance form, and examining the choice of targets in divisional buyouts.
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