Worker Earnings Mobility and the Conception of Value in Private Equity Leveraged Buyouts

Abstract

Over four leveraged buyout (LBO) waves since 1980, private equity firms restructured thousands of large U.S. businesses with tens of millions of employees. At the same time, earnings for most U.S. workers stagnated despite rising corporate productivity. While private equity proponents argue that LBOs increase corporate competitiveness and create shared value, LBO critics argue that workers often bear the cost of high LBO debt. I argue that two main conceptions of value in private equity leveraged buyouts - operational and financial - have different implications for worker earnings mobility. I use administrative data on hundreds of millions of U.S. workers to show that LBOs on average increase the earnings of more-educated workers and lower the earnings of less-educated workers. The large negative LBO effects appear in the riskier LBOs enacted at the peak of the LBO waves, when the cost of high-yield debt is low and creditors offer debt with lower restrictions on organizational behavior. Findings from worker-level difference-in-difference models support this argument. I show that the cost of high-yield debt predicts higher leveraged deals and I match LBO-acquired companies to non-acquired companies based on timing, capitalization, size, industry, stock market, earnings, and level of financial distress. This study develops the organizational theory of economic inequality by explaining how the different value conceptions of corporate restructuring have different impacts on worker opportunity. Management theorists should continue to study LBOs and other organizational restructuring processes that reassign corporate control to impact diverse stakeholder groups.