Sreedhar Bharath, Amy Dittmar, Jagadeesh Sivadasan
Do Going Private Transactions Affect Plant Productivity and Investment
Review of Financial Studies | Volume 27, Issue 7 (July 2015), 1929-1976

Changes in Productivity of Private firms

Are private firms more efficient than public firms? Jensen (1986) suggests that going-private could result in efficiency gains by aligning managers' incentives with shareholders and providing better monitoring. In this paper, we examine a broad dataset of going-private transactions, including those taken private by private equity, management and private operating firms between 1981 and 2005. We link data on going-private transactions to rich plant-level US Census microdata to examine how goingprivate affects plant-level productivity, investment, and exit (sale and closure). While we find within plant increases in measures of productivity after going-private, there is little evidence of efficiency gains relative to a control sample composed of firms from within the same industry, and of similar age and size (employment) as the going-private firms. Further, our productivity results hold excluding all plants that underwent a change in ownership after going-private, alleviating the potential concern that control plants may undergo improvements through ownership changes.

Controlling for Decision to Go Private

A key issue is the endogeneity of the going-private decision, i.e., whether firms that choose to go private are different in some way, and whether these differences account for any observed changes after going private. If the factors driving the going-private decision are related to industry-size-age factors (e.g., if say larger firms in some industries were more prone to going private), the matching in the baseline analysis controls for this flexibly. To further address potential endogeneity concerns, we create additional matched samples using past plant productivity and the propensity to go private. Both the propensity and past productivity matched analysis continue to show that plants of firms that go private do not improve their productivity relative to their matched controls. Thus, our findings suggest that operational efficiency of establishments that went private are not differentially enhanced even six years after going-private. While public, these same establishments have either higher productivity or no difference relative to control establishments. These results serve to cast doubts on the popular view that going-private produces productivity gains in plant level operations by alleviating agency issues or overinvestment problems (Jensen (1986)).

Changes in Investment and Plant Exits

Next, we examine investment decisions and establishment exits. Specifically, we examine establishment-level capital stock, employment and plant exits through sales and closures. We find that firms shrink capital stock and employment in the six years after going-private. Specifically, going-private firms decrease capital by 15.1% and employment by 3.3% relative to a size, industry and age control group. Despite these decreases in inputs, there are no productivity gains since output also falls commensurately for these firms. We further find that going-private firms exit plants more quickly (15.3% higher hazard rate) than this same matched control group, particularly in the three years after going-private. The higher exit is mainly driven by greater sales (33% higher hazard rate) rather than by closures (6.1% higher hazard rate).

We finally test whether going-private firms target lower performing plants for sales and closures after delisting. We find that going-private firms are more likely to exit by selling plants that have lower productivity. Thus, the going-private firms appear to take actions that improve the productivity of their portfolio of plants, but this is achieved through selling low productivity plants rather than through productivity improvements of individual plants. Taken together, these results suggest that: (i) agency problems and other constraints such as short-termism associated with public capital markets do not affect operational plant efficiency; (ii) investors in going-private transactions potentially gain value not by improving productivity within target plants, but by identifying productive plants, selling and closing (less productive) plants, and reducing capital.

Results by Type of Going Private Transaction

To explore potential alternative explanations of our results, we examine differences by types of acquirers involved in going-private transactions—private equity firms, management, and private operating firms. We compare changes in these groups relative to the matched control group used in earlier analysis. One explanation for the findings in this paper is that the high leverage used or the time horizon for recouping investment in going-private transactions could lead to short-termism and suboptimal decision making after delisting, as well as pressure to downsize plants. Because higher leverage and the short investment horizon are more likely to impact management buy-outs and private equity takeovers, examining the outcomes for operating acquisitions allows us to consider a sub-sample where high leverage is less of a concern.

In most specifications, regardless of the mechanism used to go private, there is no improvement in productivity relative to the matched control group. Thus, operating firm takeovers, which constitute about 45% of our sample and will have less impact from change in leverage, do not improve efficiency after going-private. We also find that operating firms have 8.3% to 11.6% declines in capital in the six years after going-private but smaller and not statistically significant declines in employment. Further, operating firms show a significantly higher propensity to both sell and close establishments relative to matched controls; in fact, operating acquirers are more likely to close a plant relative to matched controls than either private equity or management acquirers in the six years after going-private. The propensity to sell is the highest for private equity acquirers relative to the control group, with a hazard rate over twice that of operating acquirers and six-times that of management acquirers. These qualitatively similar results for the operating firm sample and the overall sample suggest that leverage or investor short-termism is unlikely to be the main explanation for the baseline results.

Conclusion

Our paper contributes to the long literature that examines productivity changes around corporate events as well as the literature on going private. In addition to providing evidence that plant-level productivity is not adversely affected by the overinvestment problem due to agency conflict in listed firms (Jensen (1986) and Jensen and Meckling (1976)), this paper also sheds light on the potential for capital market myopia, as described in Stein (1989) and supported by evidence in Graham, Harvey and Rajagopal (2005) and Bhojraj et al (2009). If market myopia leads to underinvestment, we would expect a relative increase in capital stock, employment and a greater patience to exit under-performing plants after going-private. The myopia hypothesis would also predict that there would be productivity gains relative to public firms once the constraint is removed by going-private. We find no evidence that this is the case; thus, our evidence is largely inconsistent with public firms being more subject to myopia.


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