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Dirk Engel and Joel Stiebale
Introduction
The effects of buyouts on investment of portfolio firms are a central topic in the literature on private equity (PE). Seminal theoretical contributions argue that public corporations characterized by a separation between ownership and control are inefficient due to over-investment by managers which tend to waste free cash flow on unprofitable investment projects (e.g., Jensen, 1986). Debt bonding, managements’ equity stakes, and the presence of active investors often contribute to overcome this problem (Jensen, 1986, 1989), and PE firms can induce empire-building managers to reduce over-investment after buyouts and focus on profitable investment opportunities (e.g., Kaplan ...
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