The positive externalities of leveraged buyouts

We show that private equity-sponsored public-to-private buyouts in the US evoke positive externality effects among their targets’ industry peers. Industrial organization and strategic theory suggest buyouts may impact their industry peers as a result of increased takeover threat and competitive pressure felt by the peers. We document that buyouts are associated with positive market returns and better fundamental performance in the three years following a buyout acquisition in the industry. Drilling down into specific channels of improvement, we document that industry peers mitigate the increased takeover threat and competitive pressure by significantly improving several dimensions of operational efficiency, by engaging in long-term innovation and by enhancing their corporate governance. Our results suggest that competitive factors rather than takeover threat is responsible for the spillover effects.