How do leveraged buyouts affect industry peers' performance: Evidence from Europe

Ka han, Manuel C.
A icle — Published Ve sion
How do le e aged buyou s a ec indus y pee s'
pe o mance: E idence om Eu ope
Re iew o Financial Economics
P o ided in Coope a ion wi h:
John Wiley & Sons
Sugges ed Ci a ion: Ka han, Manuel C. (2025) : How do le e aged buyou s a ec indus y pee s'
pe o mance: E idence om Eu ope, Re iew o Financial Economics, ISSN 1873-5924, Wiley,
Hoboken, NJ, Vol. 43, Iss. 4, pp. 519-547,
h ps://doi.o g/10.1002/ e.70011
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/329820
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Re Financ Econ. 2025;43:519–547.
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INTRODUCTION
A g owing body o li e a u e examines he impac o p i a e equi y (PE) in es men s on a ge i ms' indus y pee s. These
pape s documen e ec s on se e al dimensions such as co po a e go e nance s uc u e (Ha o d e al.,2016; Oxman &
Yildi im,2008), indus y p o i abili y (Alda maz & B own,2020; Be ns ein e al.,2017), in es men s a egies (T uong &
Walz,2024), and i m alua ion (Che alie ,1995a; Hsu e al.,2011; Slo in e al.,1991).
S udies analyzing he spillo e e ec s o le e aged buyou s (LBOs) on o he i ms ha e p edominan ly ocused on he
Uni ed S a es, esul ing in a spa se body o esea ch wi hin he Eu opean con ex . Howe e , a compa ison o he a ios
o PE deal alue o he ma ke capi aliza ion o he S&P 500 in he Uni ed S a es and he STOXX Eu ope 600 in Eu ope
e eals simila pa e ns o e ime, as illus a ed in Figu e1.
The g aphical illus a ion sugges s ha PE in es men s may also in luence i ms in he Eu opean ma ke . Consequen ly,
i is c ucial o in es iga e in mo e de ail whe he LBOs ha m o bene i a ge i ms' indus y pee s in Eu ope. This pape
con ibu es o he li e a u e by analyzing he impac o LBOs on he p o i abili y o indus y pee s in Eu ope and he
channels h ough which p o i abili y may be a ec ed.
As PE in es o s possess p i a e in o ma ion (e.g., Di ma e al.,2012), hei in es men s can gene a e in o ma-
ion spillo e s ha o he ma ke pa icipan s may use in hei decision- making. In his ega d, LBOs migh signal
Recei ed: 8 Ap il 2025
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Re ised: 8 Ap il 2025
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Accep ed: 21 July 2025
DOI: 10.1002/ e.70011
ORIGINAL ARTICLE
How do le e aged buyou s a ec indus y pee s'
pe o mance: E idence om Eu ope
Manuel C.Ka han1,2
This is an open access a icle unde he e ms o he C ea i e Commons A ibu ion License, which pe mi s use, dis ibu ion and ep oduc ion in any medium, p o ided
he o iginal wo k is p ope ly ci ed.
© 2025 The Au ho (s). Re iew o Financial Economics published by Wiley Pe iodicals LLC on behal o Uni e si y o New O leans.
1Uni e si y o Augsbu g, Augsbu g,
Ge many
2Uni e si y o S . Gallen, S . Gallen,
Swi ze land
Co espondence
Manuel C. Ka han, Uni e si y o
Augsbu g, Augsbu g, Ge many.
Email: [email p o ec ed]
Abs ac
This pape analyzes he impac o le e aged buyou s (LBOs) on he p o i abili y o
a ge i ms' indus y pee s in Eu ope. To add ess he endogenei y o LBO ac i -
i y, I employ a con ol unc ion app oach, using he Eu opean Takeo e Di ec i e
as an ins umen al a iable. The esul s indica e ha pee s imp o e hei p o i -
abili y ollowing LBOs, d i en by imp o ed asse u iliza ion and enhanced cos
e iciency. Unlike he indings in he US- based li e a u e, my analysis e eals ha
posi i e u u e indus y de elopmen s also con ibu e o he o e all e ec . These
indings sugges ha he impac o LBOs on indus y pee s a ies o some ex en
in he Eu opean con ex .
KEYWORDS
con ol unc ion app oach, le e aged buyou s, pee i ms, spillo e e ec s
JEL CLASSIFICATION
G23, G34
520
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KATHAN
in o ma ion abou ollow- on acquisi ions, u u e p ospec s, agency p oblems (Slo in e al.,1991), o changes in he
compe i i e en i onmen wi hin he a ge i m's indus y (Ha o d e al.,2016). A common ea u e o hese in o ma-
ional aspec s o LBOs is an inc eased h ea o akeo e s o indus y pee s. I an LBO announcemen signals u u e
p ospec s and ollow- on acquisi ions, he akeo e isk o indus y pee s inc eases (Ha o d e al.,2016). Simila ly,
indus y- wide agency p oblems a ising om he sepa a ion o owne ship and con ol may inc ease he likelihood
o akeo e s, as ine icien ly managed i ms become mo e a ac i e acquisi ion a ge s (e.g., Jensen,1986, 1993).
Finally, LBOs may a ec compe i ion (e.g., Bha a h e al.,2014; Che alie ,1995a, 1995b; Ko enock & Phillips,1997)
and inc ease he akeo e h ea , as indus y pee s espond by adjus ing hei businesses and engaging mo e ac i ely
in acquisi ions (Ha o d e al.,2016). The inc eased likelihood o being aken o e incen i izes manage s o indus y
pee s o ope a e hei i ms mo e e icien ly o educe he isk o acquisi ion, as hey ypically ace he isk o losing
hei posi ions i hei i ms a e acqui ed (Ha zell e al.,2004). Consequen ly, he impac o LBOs on he pee i ms'
p o i abili y ope a es h ough a ious channels, and he ex en o hei adjus men s may depend on he in o ma ion
con en o he LBOs.
Howe e , he ela ionship be ween LBO ac i i y and indus y pee s' p o i abili y may be spu ious. Fo example, an
unobse ed indus y s imulus could simul aneously in luence bo h LBO ac i i y and indus y pee s' ou comes, leading
o a misleading co ela ion. To add ess endogenei y issues, I employ a con ol unc ion app oach (CFA) ha uses he
Eu opean Takeo e Di ec i e (ETD) as an ins umen al a iable in he i s - s age eg ession. Speci ically, I model LBO
ac i i y as a unc ion o his ins umen al a iable, con ol a iables, and ixed e ec s. I hen inco po a e he esiduals
om his eg ession in o he second- s age eg ession, which analyzes pee i ms' ou come a iables as a unc ion o
LBO ac i i y. By including he esiduals om he i s s age, his app oach co ec s o he endogenei y o LBO ac i i y
(Heckman & Robb,1985; Woold idge,2015).
The ETD aimed o ha monize akeo e laws and acili a e akeo e s ac oss Eu opean Union (EU) coun ies (Cle c
e al.,2012). The di ec i e o ien s on he UK's akeo e law, which, o some, bu no all coun ies, mean signi ican
changes o hei akeo e laws. Indus y pee s in coun ies ha adjus ed hei akeo e egula ions due o he ETD ex-
pe ienced an inc ease in LBO ac i i y and he akeo e h ea ela i e o hose i ms in coun ies wi hou adjus men s.
The e o e, he ETD exogenously a ec s LBO ac i i y, which, in u n, in luences he beha io o indus y pee manage s
and se es as an ins umen al a iable in my analysis.
In he con ex o he CFA app oach, an ins umen is conside ed exogenous i i is unco ela ed wi h he e o e ms
in bo h he i s - and second- s age eg essions. The ETD sa is ies his condi ion due o i s ex e nal imposi ion by he
EU, which was independen o i m- speci ic o ma ke ac o s. While indi idual EU membe s a es had some lexibili y
in how hey ansposed he di ec i e in o na ional law and en o ced i s p o isions, he p ima y goal o he ETD was o
FIGURE 1 PE deal alue in ela ion o he ma ke alue o indices (Uni ed S a es s Eu ope). This igu e displays he de elopmen o
PE deal alue ela i e o he o al ma ke capi aliza ion o wo majo indices. The solid line ep esen s he o al alue o US deals ela i e o
he S&P 500, while he dashed line shows he Eu opean LBO deal alue ela i e o he ma ke capi aliza ion o he STOXX Eu ope 600. The
x- axis deno es he yea s om 1993 o 2021 (Sou ces: LSEG Eikon and CRSP).
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521
KATHAN
ha monize akeo e egula ions ac oss he EU (Cle c e al.,2012). This ha moniza ion educes conce ns abou e e se
causali y and s eng hens he ins umen 's alidi y.
Using a sample o p i a e and public LBO deals o he i e la ges Eu opean coun ies,i I ind ha indus y pee s' p o -
i abili y imp o es signi ican ly ollowing LBOs. Fu he analysis shows ha his e ec esul s om be e asse u iliza ion
o exis ing asse s and enhanced cos e iciency. Howe e , i also shows ha PE in es o s possess he abili y o iden i y in-
dus ies when hey a e a he bo om o hei p o i abili y. As a esul , hese indus ies p esen g ow h oppo uni ies, and
in es o s may ail o ully conside he u u e ope a ing pe o mance o pee i ms. Fu he mo e, he indings do no o e
e idence ha indus y pee s al e hei in e nal co po a e go e nance, in es men s a egies, o o ganiza ional s uc u es.
By conduc ing a subsample analysis ha spli s he sample a he median alues o a ious a iables, I u he explo e
he he e ogenei y o he e ec . The indings e eal ha smalle i ms and i ms wi h lowe le e age a ios imp o e p o i -
abili y ollowing LBOs. Smalle i ms possess highe g ow h oppo uni ies, while lowe le e age a ios p o ide inancial
lexibili y o cap u e in es men possibili ies (e.g., F ank & Goyal,2009). Addi ionally, he analysis p o ides e idence
ha pee s end o be mo e sensi i e o LBOs in coun y–indus ies wi h highe agency cos s and g ea e g ow h po en ial,
which ela es o he in o ma ion con en o LBOs.
The pape is mos closely ela ed o he c oss- coun y s udies by Be ns ein e al.(2017) and Alda maz and B own(2020),
which documen posi i e spillo e e ec s on indus y p o i abili y. Howe e , hese s udies analyze he impac o PE in-
es men s a he agg ega e le el, which may no e eal he comple e pic u e. Fo example, he agg ega ion o a iables
does no con ol o i m- le el in luences, which could c ea e an omi ed a iable bias p oblem (e.g., Holde ness,2016).
The e o e, his s udy uses he indi idual pee le el o explo e he he e ogenei y o indus y pee s and ex ends ou un-
de s anding o spillo e e ec s conce ning le e aged buyou s (e.g., Feng & Rao,2022; Ha o d e al.,2016; T uong &
Walz,2024). Mo eo e , he esul s o his s udy o e an al e na i e explana ion o he posi i e e ec on pee s' p o i abil-
i y. Ra he han a ibu ing he obse ed e ec p ima ily o an inc ease in compe i ion (e.g., Alda maz & B own,2020;
Feng & Rao,2022), my indings sugges ha , in addi ion o an imp o emen in e iciency, indus y de elopmen s also
con ibu e o he o e all e ec . Fu he , in con as o he exis ing li e a u e, Eu opean indus y pee s do no change hei
co po a e go e nance o al e hei in es men s a egies, unlike hei US coun e pa s (e.g., Feng & Rao,2022; Ha o d
e al.,2016; Oxman & Yildi im,2008). The Uni ed S a es, like he Uni ed Kingdom, ope a es unde a common- law sys-
em, which is cha ac e ized by well- de eloped capi al ma ke s, in es o p o ec ion, and e ec i e co po a e con ol ma -
ke s (e.g., Goe gen e al.,2005; La Po a e al.,1997, 1998). In con as , mos con inen al Eu opean coun ies a e subjec
o ci il law, which emphasizes s akeholde o ien a ion h ough codi ied laws and is accompanied by la ge sha eholde s
(blockholde - based sys em) (e.g., Goe gen e al.,2005). Eu opean i ms ha e a mo e concen a ed owne ship s uc u e
(e.g., En iques & Volpin,2007; La Po a e al.,1997, 1998) and mo e amily- con olled i ms (e.g., Faccio & Lang,2002;
Guo e al.,2011). As a esul , he manage s o indus y pee s in Eu ope espond di e en ly o LBO announcemen s, lead-
ing o dis inc implica ions o he e ec s o LBOs on o he i ms.
This s udy also con ibu es o he li e a u e on he e ec s o he Eu opean Takeo e Di ec i e. To he bes o my
knowledge, his is he i s pape o use he ETD in he con ex o LBOs. P e ious empi ical s udies ha e p ima ily o-
cused on he ETD's impac ela ed o me ge and acquisi ion (M&A) deals. While he empi ical e idence on akeo e
e iciency gains is mixed (Dissanaike e al.,2021; Humphe y- Jenne ,2012; Wang & Lah ,2017), I p o ide e idence ha
he ETD inc eased LBO ac i i y in he indus ies o ea ed coun ies ela i e o hose in con ol coun ies.
The emainde o he pape is s uc u ed as ollows. Sec ion2 de elops he s udy's unde lying hypo heses. Sec ion3
ou lines he sample cons uc ion. Sec ion4 de ails he empi ical s a egy, while Sec ion5 p esen s he esul s. Sec ion6
examines he he e ogenei y o he LBO e ec , and Sec ion7 p o ides obus ness es s. Finally, Sec ion8 summa izes and
discusses he indings wi hin he b oade LBO spillo e li e a u e.
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DEVELOPMENT OF HYPOTHESES
Li e a u e on he spillo e e ec s o LBOs documen s changes in he ope a ions o a ge i ms' indus y pee s (e.g., Feng
& Rao,2022; Ha o d e al.,2016; Oxman & Yildi im,2008). These LBO spillo e e ec s o igina e om eleasing in o -
ma ion h ough PE in es men ac i i ies. PE in es o s a e in o med agen s who possess p i a e in o ma ion (Di ma
e al.,2012) h ough hei sophis ica ed due diligence p ocess. This in o ma ion is ele an no only o a ge i ms bu
also o he en i e indus y. When hey in es in a i m, pa s o his in o ma ion become public and may be u ilized by
o he ma ke pa icipan s. In pa icula , LBOs may signal ollow- on acquisi ions, u u e p ospec s, and agency p oblems
wi hin an indus y (Slo in e al.,1991). Mo eo e , LBOs may also indica e changes in he compe i i e en i onmen
522
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KATHAN
(e.g., Bha a h e al.,2014; Che alie ,1995a, 1995b; Ko enock & Phillips,1997). On a e age, PE in es o s enhance he
p o i abili y o hei a ge i ms (e.g., Acha ya e al.,2013; Boucly e al.,2011; Guo e al.,2011), which in u n a ec s
compe i ion wi hin an indus y.
The common ea u e o he po en ial in o ma ion con en o LBOs is an inc eased h ea o akeo e s. Rega ding
ollow- on acquisi ions and u u e p ospec s, exis ing li e a u e shows ha PE- backed indus ies g ow mo e quickly
(Be ns ein e al.,2017; Boucly e al.,2011). Financial and s a egic in es o s y o cap u e hese g ow h oppo uni ies by
aking o e i ms in hese speci ic indus ies (e.g., Slo in e al.,1991). As a esul , he isk o being acqui ed inc eases o
indus y pee s (Ha o d e al.,2016).
I LBOs a e associa ed wi h indus y- wide agency p oblems a ising om sepa a ing owne ship and con ol, he like-
lihood o akeo e s migh also inc ease. Fi ms wi h highe agency cos s do no ope a e a hei op imal e iciency le el
owing o manage s' ine icien use o ee cash lows (e.g., Jensen,1986, 1993). In gene al, co po a e go e nance issues
a e co ela ed ac oss i ms wi hin an indus y. Fo example, i ms in compe i i e indus ies end o ha e lowe agency
cos s (e.g., Chhaochha ia e al.,2017; Gi oud & Muelle ,2010). Empi ical li e a u e indica es ha i ms wi h weak co po-
a e go e nance s uc u e show nega i e abno mal e u ns (e.g., Bebchuk e al.,2008; Gompe s e al.,2003). Due o hei
poo pe o mance, hese i ms may be easie o ake o e (e.g., Lel & Mille ,2015). Mo eo e , PE in es o s a e pa icu-
la ly in e es ed in poo ly pe o ming i ms because o hei es uc u ing skills (e.g., Go benko & Malenko,2014), which
con ibu es o inc eased indus y akeo e ac i i y.
LBOs may inc ease he compe i ion wi hin an indus y (e.g., Feng & Rao,2022). Consequen ly, indus y pee s may
al e hei business and in ensi y hei acquisi ion ac i i y o educe compe i i e p essu e, leading o mo e akeo e s
(Ha o d e al.,2016).
F om a heo e ical pe spec i e, LBOs in ensi y akeo e ac i i y wi hin an indus y. Empi ical e idence elucida es
an inc ease in bidde s a e acquisi ions o inancial in es o s (Di ma e al.,2012). Addi ionally, Ha o d e al.(2016)
demons a e ha LBOs p edic u u e akeo e s and inc ease he akeo e h ea o indus y pee s. The inc eased h ea
o akeo e s signaled by LBOs incen i izes he manage s o indus y pee s o un hei i ms mo e e icien ly, as hese
ansac ions o en esul in he eplacemen o he a ge i m's chie execu i e o ice s (CEO) (Ha zell e al.,2004; Kaplan
& S ombe g,2009). In his con ex , co po a e con ol ma ke s can discipline manage s (e.g., Denis & Se ano,1996;
Holms om & Kaplan,2001; Kaplan,1989; Ma in & McConnell,1991; Mo ck e al.,1989), pa icula ly i i ms ope a e
ine icien ly.
Building on his, he incen i e s uc u e o manage s should posi i ely a ec he p o i abili y o indus y pee s. In
he US con ex , s udies indica e ha indus y pee s become mo e p o i able a e LBOs (Feng & Rao,2022; T uong &
Walz,2024) and hos ile akeo e s (Se aes & Tamayo,2014). A simila a ionale should apply in he Eu opean con ex ,
leading o he ollowing hypo hesis.
Hypo hesis 1. LBOs signal an inc eased likelihood o akeo e s o a ge i ms' indus y pee s, incen i izing
manage s o enhance hei i ms' pe o mance o educe he h ea o being aken o e .
I manage s o indus y pee s imp o e hei i ms owing o he inc ease in he akeo e isk ollowing LBOs, i be-
comes essen ial o asce ain he al e a ions hey implemen o hei i ms associa ed wi h he LBO signal. One possible
way is o use hei asse s mo e e icien ly o o cu ope a ional expenses. Th ough bo h ways, indus y pee s inc ease hei
e iciency o educe u u e akeo e h ea s and compe i i e p essu e. Feng and Rao(2022) show posi i e spillo e s on
ope a ing e iciency a e PE in es men s. Thep esen s udy assumes simila e ec s on Eu opean indus y pee s. Thus,
he nex hypo hesis is as ollows.
Hypo hesis 2a. LBOs posi i ely impac he ope a ing e iciency o indus y pee s.
LBOs migh indica e indus y- wide agency p oblems (Slo in e al.,1991). To imp o e he in e nal co po a e go -
e nance s uc u e and c ea e alue in a ge i ms, PE in es o s p o ide s ong incen i es o CEOs, educe boa d size,
and closely moni o he managemen (e.g., Co nelli & Ka akaş,2012; Nikoskelainen & W igh ,2007). Likewise, indus-
y pee s migh implemen hese changes, esul ing in a posi i e ela ionship. Oxman and Yildi im(2008) empi ically
con i m he posi i e associa ion, whe eas Ha o d e al.(2016) documen a nega i e one. Gi en ha LBOs inc ease he
incen i e o imp o e co po a e go e nance by educing he likelihood o a akeo e , I p opose he ollowing hypo hesis.
Hypo hesis 2b. LBOs posi i ely impac he co po a e go e nance o indus y pee s.

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523
KATHAN
Howe e , Eu opean i ms gene ally exhibi a mo e concen a ed owne ship s uc u e han hei US coun e pa s (e.g.,
En iques & Volpin,2007). As a esul , he sepa a ion be ween owne ship and con ol may be less p oblema ic in Eu ope,
po en ially diminishing he impac o LBOs on he co po a e go e nance s uc u e o indus y pee s.
To mi iga e compe i i e p essu e and he isk o akeo e s, indus y pee s may adjus hei business ope a ions o
he new compe i i e en i onmen (e.g., Feng & Rao,2022). A he agg ega ed le el, in a c oss- coun y s udy, Alda maz
and B own(2020) show ha in es men s wi hin he indus y inc ease ollowing PE in es men s. These adjus men s
may also include inc easing he R&D expenses o indus y pee s, as a ge i ms end o become mo e inno a i e (e.g.,
Le ne e al.,2011; Ughe o,2010). In addi ion, LBO a ge s o en es uc u e hei asse s (e.g., Denis,1994; Musca ella
& Ve suypens,1990). Thus, indus y pee s may also e ocus hei o ganiza ional s uc u e o become mo e e icien and
compe i i e. F om hese a gumen s, I de i e he ollowing hypo hesis.
Hypo hesis 2c. LBOs posi i ely impac he adjus men o indus y pee s' businesses by inc easing hei
in es men o e ocusing hei o ganiza ional s uc u e.
PE in es o s may s a egically selec p o i able indus ies. Slo in e al.(1991) sugges ha LBOs indica e a o -
able indus y p ospec s, and Ha o d e al.(2019) a gue ha indus ies a e unde alued du ing managemen buy-
ou s. Thus, PE in es o s may le e age hei indus y expe ise (Kaplan & S ombe g,2009) and p i a e in o ma ion
(Di ma e al.,2012) o ime hei en y in o a pa icula indus y. In his con ex , LBO ac i i y coincides wi h he
imp o emen in indus y pee s' p o i abili y. The inc eased akeo e ac i i y esul s om less in o med ma ke pa -
icipan s en e ing a me ge sequence, o which PE in es o s end o be i s mo e s (Ha o d e al.,2016). The e o e,
he hypo hesis eads as ollows.
Hypo hesis 3. P i a e equi y in es o s can iden i y indus ies whe e p o i abili y imp o emen s a e likely o
occu , ega dless o hei in ol emen .
The cen al assump ion o his s udy is ha an inc ease in he akeo e h ea , signaled by LBOs—whe he h ough
in o ma ion abou indus y- wide agency p oblems, changes in compe i ion, o ollow- on acquisi ions—incen i izes
manage s o indus y pee s o ope a e hei i ms mo e e icien ly. While all hypo heses sugges an inc ease in akeo e
ac i i y wi hin an indus y, hey a e no mu ually exclusi e. Howe e , he implica ions o he akeo e h ea gene a ed
by LBOs a e dis inc om he obse ed ac ions o indus y pee s, which helps o disen angle he e ec and unco e he
unde lying mechanism be ween LBOs and indus y pee s' p o i abili y.
3
|
DATA AND SAMPLE CONSTRUCTION
I e ie e LBO deals om LSEG ( o me ly Re ini i ) Eikon. The sample co e s p i a e and public deals om 1993 o 2021
and ocuses on he i e la ges Eu opean coun ies in e ms o hei GDPs, ha is, F ance, Ge many, I aly, Spain, and he
Uni ed Kingdom. O he Eu opean coun ies a e signi ican ly smalle and ha e less de eloped PE ma ke s. The e o e,
i is mo e likely o obse e e ec s on he p o i abili y o indus y pee s in hese coun ies. Fu he mo e, I exclude a ge
i ms belonging o he u ili y indus y (SIC codes 4900–4999), he inancial indus y (SIC codes 6000–6999), and go e n-
men en i ies (SIC codes >9000) (e.g., Lea y & Robe s,2014). In addi ion, I ensu e ha PE unds ha e a majo i y in e es
(>50%) in he i m o implemen hei alue- c ea ing s a egies. A e applying hese il e s, he sample con ains 10,656
LBO deals.
Table1 p esen s desc ip i e s a is ics o he LBO sample. Panel A shows ha he Uni ed Kingdom accoun s o a
signi ican p opo ion o he sample, ep esen ing o e 50% o he numbe o deals (No. o deals) and nea ly hal o he
To al deal alue. LBO deals in Ge many a e la ge on a e age (Mean deal alue).ii I aly and Spain exhibi conside ably
lowe igu es in e ms o bo h To al deal alue and No. o deals. The p opo ion o public deals (Ra io o public deals)
anges om 2% o 4% compa ed o he en i e LBO sample, indica ing ha mos PE unds acqui e p i a e a ge s. Panel
B o Table1 illus a es he dis ibu ion o LBO deals ac oss indus ies, e ealing ha PE in es o s p ima ily in es in he
Manu ac u ing and Se ices indus ies wi hin he sample coun ies.
The i ms in my sample (pee i ms) a e ob ained om he Compus a Global da abase, comp ising all non- inancial,
non- u ili y, and non- go e nmen i ms om he i e analyzed coun ies in his s udy be ween 1993 and 2021. Indus ies
a e classi ied using h ee- digi SIC codes (e.g., G ennan,2019) wi hin each coun y. Based on his classi ica ion, I me ge
524
|
KATHAN
he p ima y da ase wi h he LBO sample. The inal sample consis s o 5695 i ms and 62,727 i m- yea s, o which 30,983
a e impac ed by LBO announcemen s.iii
Pee i m cha ac e is ics a e ob ained om Compus a Global, Da as eam, Capi al IQ, and Boa dex Eu ope. This
s udy employs con ol a iables simila o hose in Ha o d e al.(2016), wi h all alues con e ed o US dolla s. Table2
p esen s summa y s a is ics o he cha ac e is ics o pee i ms. The columns labeled “All i ms” epo a iable s a is ics
o he en i e sample.i
This s udy ocuses on he pe spec i e o pee i ms and hei esponse o LBO ac i i y wi hin hei indus y. In he
panel se ing, a pee i m may encoun e LBOs in some yea s and none in o he s. Acco dingly, he column labeled
“LBO” p o ides a iable s a is ics o yea s when a i m aces an LBO announcemen wi hin i s coun y- indus y,
while he “Non- LBO” column epo s s a is ics o yea s wi hou such ac i i y. The inal column compa es he mean
di e ences be ween he “LBO” and “Non- LBO” g oups o s a is ical signi icance. A his poin , I highligh a ew
obse a ions.
Fi s , Table2 shows ha i ms' p o i abili y (e.g., EBITDA- o- asse s) is signi ican ly lowe in coun y–indus y–yea s
wi h LBO ac i i y compa ed o hose wi hou . Second, i ms in he “LBO” column end o be smalle (Log(1 + Asse s)) bu
exhibi highe alua ions (M/B- a io) and lowe le e age a ios (Book le e age) han hose in he “Non- LBO” g oup. These
ini ial indings e eal no able di e ences be ween he wo g oups.
4
|
EMPIRICAL STRATEGY
This s udy employs he ollowing baseline model o examine he impac o LBOs on pee i ms:
whe e
c
deno es coun y,
i
he i m,
j
he indus y, and
he yea . The dependen a iable
yc,i,j,
+
1
ep esen s i m
i′s
cha -
ac e is ics (e.g., p o i abili y) in he subsequen pe iod. The a iable o in e es ,
LBOc,j,
, cap u es he le e aged buyou ac-
i i y in indus y
j
and coun y
c
a ime
. I p oxy his a iable as he numbe o le e aged buyou s di ided by he numbe
(1)
yc,i,j,
+
1
=
𝛼
+
𝛽1LBOc,j,
+
𝛽2Xc,i,j,
+
𝛽3Ic,j,
+
𝛽4Mc,
+
𝛾c
+
𝜂j
+
𝛿
+
𝜀c,i,j,
TABLE 1 Desc ip i e s a is ics o a ge i ms.
Panel A—LBO cha ac e is ics Coun y
Va iables F ance Ge many I aly Spain
Uni ed
Kingdom LBO sample
To al deal alue (bn $) 123.73 165.52 52.02 45.23 381.43 767.93
No. o deals 2100 1781 573 386 5816 10,656
Mean deal alue (mio $) 283.77 656.84 376.98 373.82 153.31 223.56
Ra io public deals (%) 2.71 2.92 3.84 2.85 3.94 3.48
Panel B—No. o deals pe indus y Coun y
Indus y F ance Ge many I aly Spain
Uni ed
Kingdom LBO sample
Mining 0 3 1 0 41 45
Cons uc ion 60 23 5 8 149 245
Manu ac u ing 1007 1025 397 139 2358 4926
T anspo a ion and public u ili ies 110 62 18 36 278 504
Wholesale ade 101 77 7 6 506 697
Re ail ade 102 57 21 16 397 593
Se ices 720 534 124 181 2087 3646
No e: This able p esen s desc ip i e s a is ics o LBO a ge s in F ance, Ge many, I aly, Spain, he Uni ed Kingdom, and he o e all sample (“LBO sample”)
om 1993 o 2021. Panel A shows he To al deal alue (bn$), No. o deals, Mean deal alue (mio $), and Ra io public deals (%). Panel B illus a es he No. o deals
o di e en indus ies based on he majo g oups o he S anda d Indus ial Classi ica ion (SIC). LBO a ge s in he u ili y and inancial indus ies, as well as
go e nmen en i ies, a e excluded.
|
525
KATHAN
o i ms wi hin a coun y–indus y–yea o accoun o he in ensi y o he LBO signal. This de ini ion cap u es he idea
ha mo e deals in a small indus y ha e a di e en impac han a ew deals in indus ies wi h many i ms. Con ol a i-
ables include i m- le el cha ac e is ics (
Xc,i,j,
), indus y- le el ac o s (
Ic,j,
), and mac oeconomic condi ions (
Mc,
), which
a y o e ime ac oss coun ies. Coun y (
𝛾c
) and indus y (
𝜂j
) ixed e ec s accoun o unobse ed ime- in a ian di e -
ences ac oss hese dimensions, while yea e ec s (
𝛿
) cap u e common ends and ma ke condi ions. These ixed e ec s
help con ol o ins i u ional di e ences and coun y- speci ic con ounde s. S anda d e o s a e clus e ed a he i m le el
o accoun o wi hin- i m co ela ion and he e oskedas ici y (Pe e sen,2009).
In Equa ion(1), a key conce n is he po en ial endogenei y o he LBO a iable. Fo example, a hi d a iable, such as
an unobse ed indus y s imulus, may a ec bo h LBO ac i i y and he ou come a iables o indus y pee s. As a esul ,
TABLE 2 Summa y s a is ics o pee i ms.
Va iables
All i ms LBO Non- LBO LBO e sus non- LBO
Obs. Mean Median SD Mean Mean Di . mean
P o i abili y and con ol a iables
EBITDA- o- asse s 62,727 0.041 0.088 0.227 0.028 0.053 −0.025***
Ope a ing ma gin 58,482 0.039 0.094 0.407 −0.013 0.063 −0.076***
Re u n- on- asse s 54,641 −0.011 0.028 0.164 −0.022 −0.008 −0.014***
M/B- a io 62,727 2.531 1.562 3.941 2.870 2.201 0.669***
Log(1 + Asse s) 62,727 5.092 4.867 2.228 4.741 5.435 −0.694***
Ne PPE- o- asse s 62,727 0.225 0.161 0.216 0.187 0.262 −0.075***
Book le e age 62,727 0.203 0.163 0.221 0.171 0.211 −0.040***
Log(1 + Cash) 62,727 2.896 2.597 2.035 2.706 3.082 −0.376***
Ope a ing e iciency
Tu no e a io 62,899 1.034 0.922 0.762 1.054 1.015 0.039***
Cu en asse u no e
a io
62,891 2.190 1.915 1.640 2.174 2.204 −0.030**
Expense a io 60,330 1.343 0.909 2.782 1.529 1.281 0.248***
SG&A ma gin 59,663 0.458 0.175 1.617 0.586 0.401 0.185***
Co po a e go e nance
Log(1 + Boa d size) 31,777 1.511 1.609 0.657 1.446 1.548 −0.102***
F ac ion independen
di ec o s
9090 0.296 0.286 0.206 0.286 0.290 −0.004
Log(1 + Cash
compensa ion)
35,744 0.634 0.484 0.669 0.604 0.617 −0.013*
S ock op ions- o- SHO 31,062 0.010 0.000 0.020 0.010 0.008 0.002***
In es men and asse sales
CAPX- o- asse s 57,198 0.048 0.031 0.054 0.044 0.052 −0.008***
R&D- o- asse s 21,787 0.077 0.032 0.122 0.093 0.042 0.051***
Asse sales 31,288 0.010 0.002 0.024 0.009 0.011 −0.002***
Mis alua ion and g ow h oppo uni ies
Times- se ies indus y
e o
26,483 −0.009 −0.007 0.516 0.001 −0.020 0.021***
Long- un o book alue 26,483 0.676 0.694 0.639 0.766 0.463 0.303***
Fi m- speci ic e o 26,483 0.000 0.000 0.631 −0.001 0.010 −0.011
No e: This able p esen s summa y s a is ics o all non- inancial, non- u ili y, and non- go e nmen i ms om he Compus a Global da abase be ween 1993
and 2021 o he i e la ges EU coun ies—F ance, Ge many, I aly, Spain, and he Uni ed Kingdom—based on hei GDP. The “LBO” column displays he
mean alues o a ious a iables o i ms exposed o an LBO announcemen in hei coun y–indus y–yea , while he “Non- LBO” column shows he mean
alues o hese a iables o i ms in coun y–indus y–yea s wi hou LBO exposu e. The “LBO s Non- LBO” column epo s he di e ences be ween hese
mean alues. ***, **, and * indica e s a is ical signi icance a he 1%, 5%, and 10% le els, espec i ely, based on wo- sided - es . All a iables a e winso ized a
he 1% le el. Fo a iable desc ip ions, see TableA1.
526
|
KATHAN
LBOs may no cause changes in he ope a ions o indus y pee s. To mi iga e endogenei y conce ns, I employ a con ol
unc ion app oach. Speci ically, I i s model
LBOc,j,
as a unc ion o an ins umen a iable
z
, as well as con ol a iables
and ixed e ec s. Second, I use he esiduals (
𝜈
) o he i s s age and plug hose in Equa ion(1) (s uc u al equa ion) o
co ec o he endogenous a iable LBO. To be a alid ins umen in he CFA con ex ,
z
mus be co ela ed wi h LBO
ac i i y while sa is ying he condi ions
E(
z�𝜀
)
=
0
and
E(
z�𝜈
)
=
0
(Heckman & Robb,1985; Woold idge,2015). These
condi ions es ablish he exogenei y o
z
, ensu ing ha i is unco ela ed wi h he e o e ms in bo h he i s - s age e-
g ession and he s uc u al equa ion.
Building on he a gumen a ion in Sec ion2, his s udy employs he Eu opean Takeo e Di ec i e as an exogenous
shock o LBO ac i i y and he akeo e h ea exe ed by inancial in es o s wi hin an indus y. The di ec i e a emp ed
o ha monize and imp o e akeo e ules wi hin he EU. As a esul , some coun ies had o change hei akeo e egula-
ions signi ican ly, while o he coun ies' egula ions emained unchanged (Cle c e al.,2012; Dissanaike e al.,2021). To
examine he e ec o LBOs on indus y pee s, I use he ETD as an ins umen al a iable wi hin he CFA amewo k. By
exploi ing ETD's exogenous a ia ion in LBO ac i i y, he CFA accoun s o unobse ed ac o s ha may in luence bo h
LBO ac i i y and indus y pee s' ou comes, he eby add essing po en ial endogenei y.
The ETD was p omulga ed on Ap il 21, 2004, wi h EU Membe S a es equi ed o implemen i in o na ional law by
May 21, 2006. The di ec i e se minimum akeo e equi emen s, i based on he UK's akeo e egula ions, in ending o
s anda dize ules ac oss he EU (e.g., Cle c e al.,2012; Dissanaike e al.,2021; Humphe y- Jenne ,2012). The speci ic ob-
jec i es o he ETD a e s a ed in Cle c e al.(2012, p. 11–12): (i) legal ce ain y on he akeo e bid p ocess and Communi y-
wide cla i y and anspa ency wi h espec o akeo e bids; (ii) p o ec ion o he in e es s o sha eholde s, in pa icula ,
mino i y sha eholde s, employees, and o he s akeholde s when a company is subjec o a akeo e bid o con ol; and (iii)
ein o cemen o he eedom o sha eholde s o deal in and o e on secu i ies o companies and p e en ion o managemen
ac ion ha could us a e a bid. These objec i es should acili a e akeo e bids, inc ease he akeo e h ea (i and iii),
and p o ec i m s akeholde s (ii).
The ETD al e ed he akeo e laws in he sample coun ies in di e en ways. F ance, I aly, and he Uni ed
Kingdom expe ienced no signi ican changes, so i ms in hese coun ies a e included in he con ol g oup, as he
new egula ion did no a ec LBO ac i i y. In con as , Ge many and Spain made subs an ial changes o hei ake-
o e laws. Bo h coun ies in oduced he squeeze- ou and sell- ou ules (Cle c e al.,2012; Dissanaike e al.,2021).
The squeeze- ou ule gi es he con olling sha eholde he igh o squeeze ou mino i y sha eholde s i he bidde
acqui es a ce ain pe cen age o a i m's sha es. The sell- ou igh gi es mino i y sha eholde s he igh o demand
a ai p ice o hei sha es om he con olling sha eholde s, subjec o he same condi ions as in he squeeze-
ou igh (e.g., Goe gen e al.,2005). F om a PE pe spec i e, he in oduc ion o squeeze- ou igh s is pa icula ly
ele an , as PE unds ypically acqui e all asse s. ii Mo eo e , in Spain, he manda o y bid ule, which o ces he
bidde o make a binding bid o all sha eholde s a an equi able p ice, may no be as e ec i e as in o he coun ies.
This is because sha eholde s can wai e he manda o y bid ule (Dissanaike e al.,2021), and he p i a e bene i s o
con olling sha eholde s, which ampli y he cos o a manda o y bid ule, a e conside ably lowe compa ed o o he
Eu opean coun ies (e.g., I aly) (Dyck & Zingales,2004). In Ge many, he equi able p ice mi iga ed he s eng h o
he c oss- sha eholdings as a akeo e de ense ool (Dissanaike e al.,2021). O e all, he change in akeo e ules
acili a ed acquisi ions and educed hei cos s in Ge many and Spain, making i ms in hese coun ies pa o he
ea men g oup. iii To add ess endogenei y in he LBO a iable, I exploi he ela i e change in LBO ac i i y be ween
i ms in ea ed and con ol coun ies.
In Figu e2, I show how he ETD changed he LBO ac i i y o indus ies in ea ed coun ies compa ed o indus ies
o con ol coun ies by displaying yea ly eg ession coe icien es ima es. The dependen a iable, LBO, is de ined as he
numbe o LBO deals di ided by he numbe o i ms wi hin a coun y–indus y–yea . I is eg essed on he bina y a i-
able T ea , which equals one o indus ies in ea ed coun ies and ze o o he wise.
Be o e he announcemen o he ETD in 2004, indus ies in ea ed coun ies exhibi ed conside ably lowe LBO ac i -
i y han hose in con ol coun ies, illus a ed by he nega i e coe icien s a ound −0.06. Following he implemen a ion o
he new legisla ion in he ea ed coun ies, which occu ed on July 8, 2006, in Ge many and on Ap il 13, 2007, in Spain,ix
he dispa i y in LBO ac i i y be ween he wo g oups diminished and le eled ou o simila in ensi ies.
In his ega d, Figu e2 illus a es ha he ETD posi i ely a ec s LBO ac i i y o i ms in ea ed coun ies compa ed
o hose in con ol coun ies and demons a es i s ele ance o PE in es o s and hei akeo e ac i i y. Thus, I model LBO
ac i i y in he i s s age o he CFA as ollows:
(2)
LBOc,j,
=
𝛼
+
𝛽1T ea c,j
×
Pos
+
𝛽2Mc,
−
1
+
𝛽3Ic,j,
−
1
+
𝛾c
+
𝜂j
+
𝛿
+
𝜈c,j,
|
533
KATHAN
TABLE 6 Co po a e go e nance.
Log(1 + Boa d
size) +1
F ac. ind.
di ec o s +1
Log(1 + Cash
comp.) +1
S ock
op ions- o- SHO +1
Log(1 + Boa d
size) +1
F ac. ind.
di ec o s +1
Log(1 + Cash
comp.) +1
S ock op ions- o-
SHO +1
Whole sample—OLS Res ic ed sample a ound ETD—CFA
(1) (2) (3) (4) (5) (6) (7) (8)
LBO 0.0288 −0.0148 0.0605*** −0.0015*** 0.0231 −0.0846** −0.0018 −0.0022**
(1.35) (−1.43) (3.06) (−2.97) (0.62) (−2.10) (−0.05) (−1.99)
Residuals ( i s - s age) 0.0302 0.0909** 0.0745** −0.0007
(0.82) (2.38) (2.26) (−0.63)
Con ols Yes Yes Yes Yes Yes Yes Yes Yes
Mac o con ols Yes Yes Yes Yes Yes Yes Yes Yes
Coun y FE Yes Yes Yes Yes Yes Yes Yes Yes
Indus y FE Yes Yes Yes Yes Yes Yes Yes Yes
Yea FE Yes Yes Yes Yes Yes Yes Yes Yes
Obse a ions 31,777 9090 35,744 31,062 17,596 3995 19,440 17,211
Adj- R20.395 0.366 0.350 0.247 0.342 0.406 0.306 0.259
No e: This able p esen s o dina y leas squa es (OLS) and con ol unc ion app oach (CFA) es ima ions, wi h he one- yea lead dependen a iables Log(1 + Boa d size), F ac ion independen (F ac. ind.) di ec o s,
Log(1+Cash componen ), and S ock op ions- o- sha es ou s anding (SHO). Columns (1)–(4) co e he whole sample om 1993 o 2021. Columns (5)–(8) ocus on he pe iod om 1999 o 2011, which is a ound he
implemen a ion o he ETD. The a iable LBO is de ined as he a io o LBO deals o he numbe o i ms wi hin a coun y–indus y–yea . Fo he CFA es ima ions, he ollowing i s - s age eg ession is applied:
The esiduals (
𝜈c
,
j
,
) om his eg ession, e e ed o as Residuals ( i s - s age), a e included in he analysis o Columns (5)–(8) o co ec o he endogenous a iable LBO. The bina y a iable Pos equals one o i ms in
F ance (Ge many, I aly, Spain, and he Uni ed Kingdom) om he implemen a ion da e o May 20, 2006 (July 8, 2006; July 19, 2007; Ap il 13, 2007; and May 20, 2006) o he end o he yea 2011. I is ze o om 1999
un il he day be o e each coun y's ETD implemen a ion da e. The bina y a iable T ea equals one o i ms in ea ed coun ies (Ge many, Spain) a ec ed by he ETD and ze o o i ms in con ol coun ies (F ance,
I aly, and he Uni ed Kingdom). T ea × Pos is he in e ac ion o he wo bina y a iables.
Mc,j,
−
1
ep esen lagged mac oeconomic a iables, while
Ic,j,
−
1
cap u es indus y- speci ic a iables.
𝛾c
,
𝜂j
, and
𝛿
deno e coun y,
indus y, and ime ixed e ec s, espec i ely (see Table3, Column (2) o he eg ession esul s). Fo a iable desc ip ions, see TableA1. Fi ms in he u ili y and inancial indus ies, as well as go e nmen en i ies, a e
excluded. All con inuous a iables a e winso ized a he 1% le el a bo h ends. Con ol and mac o con ol a iables co espond o hose in Table4. All eg essions include a cons an . S anda d e o s a e clus e ed a he
i m le el, and - alues a e epo ed in pa en heses. *** and ** indica e s a is ical signi icance a he 1% and 5% le els, espec i ely.
LBOc,j,
=
𝛼
+
𝛽1T ea c,j
×
Pos
+
𝛽2Mc,
−
1
+
𝛽3Ic,j,
−
1
+
𝛾c
+
𝜂j
+
𝛿
+
𝜈c,j,

534
|
KATHAN
To es empi ically whe he he g aphical illus a ion e lec s g ow h oppo uni ies o p o ides a bene icial indus y
alua ion o PE in es o s, I employ he M/B decomposi ion o Rhodes- K op e al.(2005). I decomposes he M/B a io
in o h ee dis inc componen s. The M/B a io is o en used as a p oxy o a i m's g ow h oppo uni ies (e.g., F ank &
Goyal,2009) o i m alua ion (e.g., Pás o & Pie o,2003).xiii The i s componen , Fi m- speci ic e o (FSE), measu es
i m- speci ic de ia ions om he undamen al alue implied by indus y mul iples. The second componen , Time- se ies
indus y e o (TSIE), examines sho - e m indus y- le el de ia ions om hei long- un alues. Bo h componen s cap-
u e he misp icing pa o he M/B a io. In pa icula , TSIE p o ides in o ma ion on he mis alua ion o i ms ega ding
hei indus y alua ion e o . The hi d componen , Long- un o book alue (LR B), indica es a i m's g ow h po en ial, as
i measu es he long- un a e age g ow h a es o an a e age i m in an indus y.
TABLE 7 In es men s and asse sales.
CAPX-
o −asse s +1
R&D-
o −asse s +1
Asse
sales +1
CAPX-
o −asse s +1
R&D-
o −asse s +1
Asse
sales +1
Whole sample—OLS Res ic ed sample a ound ETD—CFA
(1) (2) (3) (4) (5) (6)
LBO −0.0025** −0.0039 0.0003 −0.0009 −0.0214** −0.0012
(−2.54) (−1.42) (0.53) (−0.35) (−2.41) (−0.47)
M/B- a io 0.0007*** 0.0022*** −0.0000 0.0006*** 0.0022*** −0.0000
(9.77) (5.25) (−0.37) (6.11) (3.94) (−0.02)
Log(1 + Asse s) −0.0045*** −0.0351*** −0.0010*** −0.0039*** −0.0346*** −0.0005*
(−11.55) (−17.21) (−3.86) (−8.20) (−13.22) (−1.75)
Ne PPE- o- asse s 0.0938*** −0.0449*** 0.0089*** 0.0964*** −0.0382** 0.0116***
(27.99) (−3.45) (4.53) (23.20) (−2.12) (4.98)
Book le e age −0.0069*** 0.0515*** 0.0095*** −0.0075*** 0.0523*** 0.0086***
(−3.41) (3.36) (5.94) (−2.88) (2.94) (4.58)
Log(1 + Cash) 0.0042*** 0.0245*** −0.0005** 0.0042*** 0.0241*** −0.0006**
(10.62) (13.71) (−2.16) (8.88) (10.44) (−2.19)
He indahl index −0.0037* −0.0024 0.0000 −0.0026 −0.0113 0.0011
(−1.95) (−0.33) (0.01) (−1.07) (−1.17) (0.74)
Residuals
( i s - s age)
−0.0031 0.0199** 0.0012
(−1.27) (2.05) (0.49)
Mac o con ols Yes Yes Yes Yes Yes Yes
Coun y FE Yes Yes Yes Yes Yes Yes
Indus y FE Yes Yes Yes Yes Yes Yes
Yea FE Yes Yes Yes Yes Yes Yes
Obse a ions 57,198 21,787 31,288 30,412 9997 17,897
Adj- R20.250 0.339 0.086 0.241 0.318 0.086
No e: This able p esen s o dina y leas squa es (OLS) and con ol unc ion app oach (CFA) es ima ions, wi h he one- yea lead dependen a iables CAPX-
o- asse s, R&D- o- asse s, and Asse sales. Columns (1)–(3) co e he whole sample om 1993 o 2021. Columns (4)–(6) ocus on he pe iod om 1999 o 2011,
which is a ound he implemen a ion o he Eu opean ETD. The a iable LBO is de ined as he a io o LBO deals o he numbe o i ms wi hin a coun y–
indus y–yea . Fo he CFA es ima ions, he ollowing i s - s age eg ession is applied:
The esiduals (
𝜈c,j,
) om his eg ession, e e ed o as Residuals ( i s - s age), a e included in he analysis o Columns (4)–(6) o co ec o he endogenous
a iable LBO. The bina y a iable Pos equals one o i ms in F ance (Ge many, I aly, Spain, and he Uni ed Kingdom) om he implemen a ion da e o May
20, 2006 (July 8, 2006; July 19, 2007; Ap il 13, 2007; and May 20, 2006) o he end o he yea 2011. I is ze o om 1999 un il he day be o e each coun y's
ETD implemen a ion da e. The bina y a iable T ea equals one o i ms in ea ed coun ies (Ge many, Spain) a ec ed by he ETD and ze o o i ms in
con ol coun ies (F ance, I aly, and he Uni ed Kingdom). T ea × Pos is he in e ac ion o he wo bina y a iables.
Mc,j,
−
1
ep esen lagged mac oeconomic
a iables, while
Ic,j,
−
1
cap u es indus y- speci ic a iables.
𝛾c
,
𝜂j
, and
𝛿
deno e coun y, indus y, and ime ixed e ec s, espec i ely (see Table3, Column (2)
o he eg ession esul s). Fo a iable desc ip ions, see TableA1. Fi ms in he u ili y and inancial indus ies, as well as go e nmen en i ies, a e excluded. All
con inuous a iables a e winso ized a he 1% le el a bo h ends. All eg essions include a cons an . S anda d e o s a e clus e ed a he i m le el, and - alues
a e epo ed in pa en heses. ***, **, and * indica e s a is ical signi icance a he 1%, 5%, and 10% le els, espec i ely.
LBOc
,
j
,
=𝛼+𝛽
1
T ea c
,
j×Pos +𝛽
2
Mc
,
−1
+𝛽
3
Ic
,
j
,
−1
+𝛾c+𝜂j+𝛿 +𝜈c
,
j
,
|
535
KATHAN
Table8 uses hese h ee componen s as dependen a iables. Howe e , ins ead o using con inuous componen a i-
ables, I c ea e bina y a iables o ca ego ize i ms in o g ow h and unde alued i ms.xi Fi s , TSIE (bina y), which
equals one i sho - e m le els a e below hei long- un alues, indica es indus y unde alua ion. Second, LR B (bina y)
equals one i he long- un alues a e abo e he cu en book alue, implying g ow h oppo uni ies o a i m. Finally,
FSE (bina y) is one i he ma ke alue is below he i m's undamen al alue. These a iables a e equal o ze o i he
espec i e condi ion o he a iable is no me . Impo an ly, I use hese dependen a iables con empo aneously because
PE in es o s likely possess an in o ma ion ad an age. In he case o indus y unde alua ion, his ad an age would likely
diminish apidly i ma ke s a e e icien and would no be obse able in he subsequen pe iod.
Column (1) indica es ha he likelihood o he sho - e m alue implied by indus y mul iples o an indus y pee
being below i s long- un alue inc eases signi ican ly wi h an inc ease in LBO ac i i y. Fu he mo e, indus y pee s also
exhibi signi ican ly highe g ow h po en ial (long- un alues a e abo e he cu en book alue) when exposed o LBOs
(Column (2)). Howe e , in he CFA models, which co ec o he endogenei y o LBO, only he e ec on he unde alu-
a ion o an indus y pee a he indus y le el (Column (4)) emains signi ican . The esul s in Table8 also sugges ha
he i m- speci ic unde alua ion (ma ke alue o a pee is below i s sho - e m alue implied by indus y mul iples) o
indus y pee s (Columns (3) and (6)) does no play a ole in his con ex .
These indings suppo hypo hesis 3, indica ing ha indus y pee s' pe o mance imp o emen can also be a ibu ed
o indus y de elopmen s, speci ically indus y unde alua ion. In his ega d, in es o s do no accoun ully o u u e
ope a ing pe o mance, and PEs a e able o selec hose indus ies.
These esul s a e consis en wi h a ional models in which PE in es o s possess p i a e in o ma ion ha is no pa o
he in o ma ion se o o he in es o s a ime (e.g., Rhodes- K op & Viswana han,2004).
Exis ing li e a u e con ibu ions do no a ibu e he imp o emen in indus y pee s' p o i abili y o he selec ion skills o
PE in es o s (e.g., Alda maz & B own,2020; Feng & Rao,2022). They a gue ha compe i i e spillo e s cause indus y pee s o
adjus hei business. This sec ion p o ides e idence ha he iming o LBOs is a c ucial ac o in explaining he o e all e ec .
6
|
HETEROGENEITY IN THE PROFITABILITY OF INDUSTRY PEERS
6.1
|
Fi m- le el
In his sec ion, I pe o m se e al subsample analyses o gain deepe insigh s in o he posi i e impac o LBOs and o
iden i y he i ms ha a e mos a ec ed. To achie e his, I spli he sample a he median o he a iables Log(1 + Asse s),
M/B- a io, Book le e age, and Owne ship concen a ion.x Mo e speci ically, I examine whe he i m size, g ow h
oppo uni ies, inancial lexibili y, and owne ship s uc u e play a ole in his con ex .
In Table9, he one- yea lead dependen a iables a e EBITDA- o- asse s and Ope a ing ma gin. The analysis ocuses on
he “ es ic ed sample” a ound he ETD, applying CFA eg essions.
In Panel A, al hough all coe icien s o LBO a e posi i e and s a is ically signi ican , he e ec is mo e p onounced in
magni ude o i ms ha a e equal o o below he sample median o “Log(1 + Asse s)” (Columns (1) and (2)), and o
i ms abo e he sample median o he “M/B- a io” (Columns (7) and (8)).
FIGURE 3 Indus y p o i abili y. This igu e displays he de elopmen o he a e age p o i abili y wi hin a coun y–indus y–yea . The
x- axis indica es he yea s ela i e o he yea o an LBO announcemen . The solid (dashed) line depic s he a e age indus y EBITDA- o-
asse s (Ope a ing ma gin). Fo a iable desc ip ions, see TableA1.
536
|
KATHAN
Smalle i ms end o ha e highe g ow h oppo uni ies, o which he esul s ind some e idence o highe LBO
ac i i y in he p e ious sec ion. Mo eo e , hese i ms a e likely easie o ake o e because o hei size. Thus, i
LBOs signal ollow- on acquisi ions, manage s o small indus y pee s and hose wi h high g ow h oppo uni ies may
be mo e incen i ized o educe he akeo e isk and un hei i ms mo e e icien ly han manage s o la ge indus-
y pee s. Fu he mo e, smalle i ms a e less ollowed by analys s (e.g., Bhushan,1989; Lobo e al.,2012), which
may suppo he unde alua ion a gumen in Sec ion5.3, as mo e analys s p o ide mo e meaning ul in o ma ion
(e.g., Li e al.,2019).
Fi ms wi h lowe le e age a ios ha e g ea e inancial lexibili y, enabling hem o cap u e in es men possibili ies
(e.g., F ank & Goyal,2009). Mo eo e , a highe akeo e h ea may posi i ely a ec he le e age a io since deb can be
TABLE 8 LBOs and indus y de elopmen s.
TSIE
(bina y)
LR B
(bina y)
FSE
(bina y)
TSIE
(bina y)
LR B
(bina y)
FSE
(bina y)
Whole sample—OLS Res ic ed sample a ound ETD—CFA
(1) (2) (3) (4) (5) (6)
LBO 0.0403** 0.0327**
−
0.0181 0.1476***
−
0.0018
−
0.0261
(2.00) (2.29) (
−
0.91) (3.84) (
−
0.07) (
−
0.63)
Log(1 + Asse s)
−
0.0057** 0.0200***
−
0.0005 0.0018 0.0219*** 0.0021
(
−
2.20) (7.42) (
−
0.18) (0.55) (6.55) (0.58)
Ne PPE- o- asse s
−
0.0035
−
0.0399**
−
0.0136 0.0156
−
0.0488**
−
0.0216
(
−
0.25) (
−
2.13) (
−
0.92) (0.89) (
−
2.22) (
−
1.16)
Book le e age 0.0229
−
0.1552*** 0.0367**
−
0.0356
−
0.1674*** 0.0241
(1.32) (
−
8.64) (1.98) (
−
1.55) (
−
7.56) (1.00)
Log(1 + Cash)
−
0.0038
−
0.0055**
−
0.0048*
−
0.0049
−
0.0061*
−
0.0091**
(
−
1.47) (
−
2.07) (
−
1.69) (
−
1.45) (
−
1.95) (
−
2.55)
He indahl index 0.0069
−
0.0677***
−
0.0037 0.0416
−
0.0627**
−
0.0098
(0.30) (
−
3.41) (
−
0.15) (1.23) (
−
2.18) (
−
0.29)
Residuals ( i s - s age)
−
0.0769* 0.0260 0.0141
(
−
1.93) (0.94) (0.33)
Mac o con ols Yes Yes Yes Yes Yes Yes
M/B decomposi ion Yes Yes Yes Yes Yes Yes
Coun y FE Yes Yes Yes Yes Yes Yes
Indus y FE Yes Yes Yes Yes Yes Yes
Yea FE Yes Yes Yes Yes Yes Yes
Obse a ions 28,848 28,848 28,848 15,256 15,256 15,256
Adj- R20.575 0.459 0.577 0.596 0.466 0.587
No e: This able p esen s o dina y leas squa es (OLS) and con ol unc ion app oach (CFA) es ima ions, wi h bina y- dependen a iables based on he M/B-
decomposi ion o Rhodes- K op e al.(2005). TSIE (bina y) equals one i a i m's implied sho - e m alue is below i s implied long- un alue, bo h based
on indus y mul iples. LR B (bina y) equals one i he implied long- un alue o a i m is abo e i s cu en book alue. FSE (bina y) is equal o one i a i m's
ma ke alue is below i s sho - e m alue. These a iables a e ze o i he condi ions a e no me . Columns (1)–(3) co e he whole sample om 1993 o 2021.
Columns (4)–(6) ocus on he pe iod om 1999 o 2011, which is a ound he implemen a ion o he ETD. The a iable LBO is de ined as he a io o LBO deals
o he numbe o i ms wi hin a coun y–indus y–yea . Fo he CFA es ima ions, he ollowing i s - s age eg ession is applied:
The esiduals (
𝜈c,j,
) om his eg ession, e e ed o as Residuals ( i s - s age), a e included in he analysis o Columns (4)–(6) o co ec o he endogenous
a iable LBO. The bina y a iable Pos equals one o i ms in F ance (Ge many, I aly, Spain, and he Uni ed Kingdom) om he implemen a ion da e o May
20, 2006 (July 8, 2006; July 19, 2007; Ap il 13, 2007; and May 20, 2006) o he end o he yea 2011. I is ze o om 1999 un il he day be o e each coun y's ETD
implemen a ion da e. The bina y a iable T ea equals one o i ms in ea ed coun ies (Ge many, Spain) by he ETD and ze o o i ms in con ol coun ies
(F ance, I aly, and he Uni ed Kingdom). T ea × Pos is he in e ac ion o he wo bina y a iables.
Mc,j,
−
1
ep esen lagged mac oeconomic a iables, while
Ic,j,
−
1
cap u es indus y- speci ic a iables.
𝛾c
,
𝜂j
, and
𝛿
deno e coun y, indus y, and ime ixed e ec s, espec i ely (see Table3, Column (2) o he eg ession
esul s). Fo a iable desc ip ions, see TableA1. Fi ms in he u ili y and inancial indus ies, as well as go e nmen en i ies, a e excluded. All con inuous
a iables a e winso ized a he 1% le el a bo h ends. All eg essions include a cons an . S anda d e o s a e clus e ed a he i m le el, and - alues a e epo ed
in pa en heses. ***, **, and * indica e s a is ical signi icance a he 1%, 5%, and 10% le els, espec i ely.
LBOc,j,
=
𝛼
+
𝛽1T ea c,j
×
Pos
+
𝛽2Mc,
−
1
+
𝛽3Ic,j,
−
1
+
𝛾c
+
𝜂j
+
𝛿
+
𝜈c,j,
|
537
KATHAN
TABLE 9 He e ogenei y in indus y pee s' p o i abili y—Fi m- le el.
Panel A
EBITDA-
o −asse s +1
Ope a ing
ma gin +1
EBITDA-
o −asse s +1
Ope a ing
ma gin +1
EBITDA-
o −asse s +1
Ope a ing
ma gin +1
EBITDA-
o −asse s +1
Ope a ing
ma gin +1
Log(1 + Asse s) M/B- a io
≤Median >Median ≤Median >Median
(1) (2) (3) (4) (5) (6) (7) (8)
LBO 0.0777*** 0.1158*** 0.0180*** 0.0265** 0.0213* 0.0481** 0.0650*** 0.0880***
(4.43) (2.78) (3.14) (2.37) (1.89) (2.17) (4.35) (2.90)
Residuals
( i s - s age)
Yes Yes Yes Yes Yes Yes Yes Yes
Con ols Yes Yes Yes Yes Yes Yes Yes Yes
Mac o con ols Yes Yes Yes Yes Yes Yes Yes Yes
Coun y FE Yes Yes Yes Yes Yes Yes Yes Yes
Indus y FE Yes Yes Yes Yes Yes Yes Yes Yes
Yea FE Yes Yes Yes Yes Yes Yes Yes Yes
Obse a ions 16,152 14,237 16,246 16,146 17,236 16,334 15,158 14,046
Adj- R20.277 0.179 0.144 0.108 0.247 0.115 0.288 0.202
Panel B
EBITDA-
o −asse s +1
Ope a ing
ma gin +1
EBITDA-
o −asse s +1
Ope a ing
ma gin +1
EBITDA-
o −asse s +1
Ope a ing
ma gin +1
EBITDA-
o −asse s +1
Ope a ing
ma gin +1
Book le e age Owne ship concen a ion
≤Median >Median ≤Median >Median
(1) (2) (3) (4) (5) (6) (7) (8)
LBO 0.0694*** 0.0910*** 0.0269*** 0.0328 0.0287** 0.0496 0.0494*** 0.0683**
(4.52) (3.34) (2.86) (1.44) (2.36) (1.60) (3.38) (2.37)
Residuals
( i s - s age)
Yes Yes Yes Yes Yes Yes Yes Yes
Con ols Yes Yes Yes Yes Yes Yes Yes Yes
Mac o con ols Yes Yes Yes Yes Yes Yes Yes Yes
Coun y FE Yes Yes Yes Yes Yes Yes Yes Yes
Indus y FE Yes Yes Yes Yes Yes Yes Yes Yes
Yea FE Yes Yes Yes Yes Yes Yes Yes Yes
Obse a ions 16,606 14,889 15,535 15,320 12,803 11,926 13,050 12,321
Adj- R20.269 0.188 0.185 0.133 0.302 0.204 0.252 0.127
No e: This able p esen s subsample analyses using con ol unc ion app oach (CFA) es ima ions, wi h he one- yea lead dependen a iables EBITDA- o- asse s
and Ope a ing ma gin. The analysis uses he es ic ed sample om 1999 o 2011, which is a ound he implemen a ion o he ETD. The a iable LBO is de ined
as he a io o LBO deals o he numbe o i ms wi hin a coun y–indus y–yea . Fo he CFA es ima ions, he ollowing i s - s age eg ession is applied:
The esiduals (
𝜈c
,
j
,
) om his eg ession, e e ed o as Residuals ( i s - s age), a e included in he analysis o co ec o he endogenous a iable LBO. The
bina y a iable Pos equals one o i ms in F ance (Ge many, I aly, Spain, and he Uni ed Kingdom) om he implemen a ion da e o May 20, 2006 (July 8,
2006; July 19, 2007; Ap il 13, 2007; and May 20, 2006) o he end o he yea 2011. I is ze o om 1999 un il he day be o e each coun y's ETD implemen a ion
da e. The bina y a iable T ea equals one o i ms in ea ed coun ies (Ge many, Spain) a ec ed by he ETD and ze o o i ms in con ol coun ies (F ance,
I aly, and he Uni ed Kingdom). T ea × Pos is he in e ac ion o he wo bina y a iables.
Mc
,
j
,
−
1
ep esen lagged mac oeconomic a iables, while
Ic
,
j
,
−
1
cap u es indus y- speci ic a iables.
𝛾c
,
𝜂j
, and
𝛿
deno e coun y, indus y, and ime ixed e ec s, espec i ely (see Table3, Column (2) o he eg ession
esul s). Panel A spli s he sample based on he median alues o Log(1 + Asse s) and he M/B- a io, while Panel B spli s he sample a he median alues
o Book le e age and Owne ship concen a ion. Fo a iable desc ip ions, see TableA1. Fi ms in he u ili y and inancial indus ies, as well as go e nmen
en i ies, a e excluded. All con inuous a iables a e winso ized a he 1% le el a bo h ends. Con ol and mac o con ol a iables co espond o hose in Table4.
All eg essions include a cons an . S anda d e o s a e clus e ed a he i m le el, and - alues a e epo ed in pa en heses. ***, **, and * indica e s a is ical
signi icance a he 1%, 5%, and 10% le els, espec i ely.
LBOc,j,
=
𝛼
+
𝛽1T ea c,j
×
Pos
+
𝛽2Mc,
−
1
+
𝛽3Ic,j,
−
1
+
𝛾c
+
𝜂j
+
𝛿
+
𝜈c,j,
538
|
KATHAN
used as a de ense ool (e.g., Ga ey & Hanka,1999; Sa ieddine & Ti man,1999) and imp o e p o i abili y i i ms use deb
conse a i ely (e.g., G aham,2000). In line wi h his easoning, Panel B indica es ha he posi i e LBO e ec is mo e
p onounced o pee i ms wi h equal o below- median “Book le e age.”
Eu opean i ms end o ha e highe owne ship concen a ion han US i ms (e.g., En iques & Volpin,2007), mak-
ing hem mo e di icul o ake o e (e.g., Holde ness & Sheehan,1988; La Po a e al.,1999). Howe e , he esul s in
Columns (5)–(8) sugges ha pee i ms wi h la ge sha eholde s (Columns (7) and (8)) bene i mo e om LBO ac i i y.
La ge sha eholde s may enhance he moni o ing o manage s (e.g., Ag awal & Mandelke ,1990; Shlei e & Vishny,1997),
he eby incen i izing manage s o imp o e i m pe o mance.
6.2
|
Indus y- le el
This sec ion o e s a mo e in- dep h analysis o he LBO channels and hei impac on he akeo e h ea in ela ion o he
p o i abili y o indus y pee s. Simila o he subsample analysis in Sec ion6.1, I di ide he sample based on he median
alues o he ollowing a iables a he coun y–indus y le el: he No. o LBO deals, Tu no e a io, He indahl index,
and M/B a io. These a iables se e as p oxies o he a ious aspec s o he akeo e h ea gene a ed by LBO ac i i y.
Columns (1)–(4) o Panel A in Table10 accoun o he low o high le els o ollow- on acquisi ions, while Columns
(5)–(8) cap u e hese le els o indus y- wide agency p oblems. I use he u no e a io a he coun y- indus y le el as a
p oxy o he agency cos s, as a highe u no e a io indica es mo e e icien asse u iliza ion and sugges s an in e se e-
la ionship wi h agency cos s (e.g., Ang e al.,2000). The esul s sugges ha indus y pee s wi h ewe LBO deals in hei
indus y end o ha e a sligh ly s onge LBO e ec on hei p o i abili y. Mo eo e , indus y pee s wi h u no e a ios
equal o below hei coun y–indus y median, indica ing highe agency cos s, demons a e a mo e p onounced e ec
wi h LBO ac i i y. E en hough Table6 does no indica e an imp o emen in he in e nal co po a e go e nance s uc u e,
indus y pee s wi h highe agency cos s a e mo e sensi i e o LBOs in enhancing hei p o i abili y.
In Panel B o Table10, Columns (1)–(4) show simila e ec s on indus y pee s in he compe i i e and non- compe i i e
subsamples. The compe i ion channel is associa ed wi h an inc ease in in es men ac i i y o changes in he o ganiza-
ional s uc u e o indus y pee s, which Sec ion5.2 does no suppo . Rega ding he subsamples o he coun y–indus y
M/B a io, he magni ude o LBO on he dependen a iables appea s o be mo e p onounced in he high- M/B a io sub-
sample (Columns (7)–(8)), which aligns wi h he esul s in Table9.
O e all, his sec ion p o ides e idence ha , i s , i ms cha ac e ized by small size, g ow h po en ial, inancial lex-
ibili y, and concen a ed owne ship end o gain mos ly om LBO ac i i y. Second, pee i ms in indus ies wi h high
agency cos s and s ong g ow h oppo uni ies, which a e also ela ed o he po en ial signals o LBOs, end o exhibi a
mo e p onounced esponse o LBOs.
7
|
ROBUSTNESS TESTS
Using he ETD as an ins umen al a iable in he i s s age o he CFA eg essions co ec s o he po en ial endo-
genei y o LBO ac i i y, he eby helping o in es iga e he impac o LBOs on hei indus y pee s. In addi ion o he
a gumen a ion in Sec ion4 ega ding he exogenei y o he ETD, i is essen ial o conside a i m's ins i u ional and
legal con ex (Ka po & Wi y,2018) owing o omi ed a iables. In his con ex , i is possible ha un ela ed cou
decisions a ound he ETD in EU Membe S a es may ha e in luenced he ins i u ional en i onmen (Dissanaike
e al.,2021) and, in u n, impac ed he LBO ma ke wi hin hese coun ies. Howe e , he ETD o e s se e al bene i s
ega ding he ins i u ional amewo k compa ed o changes in business combina ion laws in he US con ex . Fi s ,
he legisla i e powe o cou decisions in he EU is compa a i ely weake han in he Uni ed S a es. Second, he ETD
co e s se e al di e en egula o y elemen s, while hese elemen s a e dis inc laws in he Uni ed S a es ha a e mo e
challenging o accoun o (Dissanaike e al.,2021; Ka po & Wi y,2018). Fu he mo e, he empi ical models used
in he i s - s age eg essions include coun y, indus y, and ime ixed e ec s, which accoun o ins i u ional and
coun y- speci ic di e ences.
To empi ically es whe he o he e en s o cou decisions a ound he ETD in luence he pe o mance o i ms, I un
wo placebo es s in Panel A o TableA3 (AppendixA). Mo e speci ically, he implemen a ion da es in he coun ies we e
shi ed o bo h ends wi hin my sample. In Columns (1)–(3), he placebo ETD co e s he yea s 1993 o 2002 (“Be o e”),
and Columns (4)–(6) co e he yea s om 2012 o 2021 (“A e ”).

|
539
KATHAN
TABLE 10 He e ogenei y in indus y pee s' p o i abili y—Indus y- le el.
Panel A
EBITDA-
o −asse s +1
Ope a ing
ma gin +1
EBITDA-
o −asse s +1
Ope a ing
ma gin +1
EBITDA-
o −asse s +1
Ope a ing
ma gin +1
EBITDA-
o −asse s +1
Ope a ing
ma gin +1
Coun y–indus y – No. o LBO deals Coun y–indus y – Tu no e a io
≤Median >Median ≤Median >Median
(1) (2) (3) (4) (5) (6) (7) (8)
LBO 0.0388*** 0.0780*** 0.0465*** 0.0460 0.0462*** 0.1264** 0.0344*** 0.0197*
(3.02) (3.20) (3.25) (1.40) (2.62) (2.25) (3.27) (1.74)
Residuals
( i s - s age)
Yes Yes Yes Yes Yes Yes Yes Yes
Con ols Yes Yes Yes Yes Yes Yes Yes Yes
Mac o
con ols
Yes Yes Yes Yes Yes Yes Yes Yes
Coun y FE Yes Yes Yes Yes Yes Yes Yes Yes
Indus y FE Yes Yes Yes Yes Yes Yes Yes Yes
Yea FE Yes Yes Yes Yes Yes Yes Yes Yes
Obse a ions 16,980 15,955 15,421 14,431 14,446 12,786 17,942 17,588
Adj- R20.239 0.141 0.297 0.200 0.229 0.120 0.279 0.183
Panel B
EBITDA-
o −asse s +1
Ope a ing
ma gin +1
EBITDA-
o −asse s +1
Ope a ing
ma gin +1
EBITDA-
o −asse s +1
Ope a ing
ma gin +1
EBITDA-
o −asse s +1
Ope a ing
ma gin +1
Coun y–indus y – He indahl index Coun y–indus y – M/B- a io
≤Median >Median ≤Median >Median
(1) (2) (3) (4) (5) (6) (7) (8)
LBO 0.0481*** 0.0735** 0.0446*** 0.0561*** 0.0312*** 0.0354** 0.0667*** 0.1023***
(3.06) (2.41) (4.02) (2.58) (2.91) (2.29) (4.00) (2.72)
Residuals
( i s - s age)
Yes Yes Yes Yes Yes Yes Yes Yes
Con ols Yes Yes Yes Yes Yes Yes Yes Yes
Mac o
con ols
Yes Yes Yes Yes Yes Yes Yes Yes
Coun y FE Yes Yes Yes Yes Yes Yes Yes Yes
Indus y FE Yes Yes Yes Yes Yes Yes Yes Yes
Yea FE Yes Yes Yes Yes Yes Yes Yes Yes
Obse a ions 17,453 16,150 14,944 14,235 17,271 16,672 15,124 13,708
Adj- R20.239 0.141 0.297 0.200 0.229 0.120 0.279 0.183
No e: This able p esen s subsample analyses using con ol unc ion app oach (CFA) es ima ions, wi h he one- yea lead dependen a iables EBITDA- o- asse s
and Ope a ing ma gin. The analysis uses he es ic ed sample om 1999 o 2011, which is a ound he implemen a ion o he ETD. The a iable LBO is de ined
as he a io o LBO deals o he numbe o i ms wi hin a coun y–indus y–yea . Fo he CFA es ima ions, he ollowing i s - s age eg ession is applied:
The esiduals (
𝜈c
,
j
,
) om his eg ession, e e ed o as Residuals ( i s - s age), a e included in he analysis o co ec o he endogenous a iable LBO. The
bina y a iable Pos equals one o i ms in F ance (Ge many, I aly, Spain, and he Uni ed Kingdom) om he implemen a ion da e o May 20, 2006 (July 8,
2006; July 19, 2007; Ap il 13, 2007; May 20, 2006) o he end o he yea 2011. I is ze o om 1999 un il he day be o e each coun y's ETD implemen a ion da e.
The bina y a iable T ea equals one o i ms in ea ed coun ies (Ge many, Spain) a ec ed by he ETD and ze o o i ms in con ol coun ies (F ance, I aly,
and he Uni ed Kingdom). T ea × Pos is he in e ac ion o he wo bina y a iables.
Mc
,
j
,
−
1
ep esen lagged mac oeconomic a iables, while
Ic
,
j
,
−
1
cap u es
indus y- speci ic a iables.
𝛾c
,
𝜂j
, and
𝛿
deno e coun y, indus y, and ime ixed e ec s, espec i ely (see Table3, Column (2) o he eg ession esul s). Panel
A spli s he sample based on he coun y–indus y median alues o No. o LBO deals and he Tu no e a io, while Panel B spli s he sample a he coun y–
indus y median alues o he He indahl index and he M/B- a io. Fo a iable desc ip ions, see TableA1. Fi ms in he u ili y and inancial indus ies, as well
as go e nmen en i ies, a e excluded. All con inuous a iables a e winso ized a he 1% le el a bo h ends. Con ol and mac o con ol a iables co espond
o hose in Table4. All eg essions include a cons an . S anda d e o s a e clus e ed a he i m le el, and - alues a e epo ed in pa en heses. ***, **, and *
indica e s a is ical signi icance a he 1%, 5%, and 10% le els, espec i ely.
LBOc,j,
=
𝛼
+
𝛽1T ea c,j
×
Pos
+
𝛽2Mc,
−
1
+
𝛽3Ic,j,
−
1
+
𝛾c
+
𝜂j
+
𝛿
+
𝜈c,j,
540
|
KATHAN
The esul s display insigni ican coe icien s o T ea × Pos in all columns excep o Column (1), which shows a
signi ican ly nega i e coe icien . This sugges s ha o he e en s su ounding he ETD do no signi ican ly impac he
beha io o i ms. The e o e, he posi e and signi ican e ec obse ed in he main esul s e lec he ETD's impac on
indus y pee s' p o i abil y by al e ing LBO ac i i y and he akeo e h ea in ea ed coun ies. Fu he mo e, LBO ac i -
i y consis en ly shows a posi i e and s a is ically signi ican ela ionship wi h he dependen a iables ac oss all models.
Panel B o TableA3 p esen s al e na i e p oxies o he LBO a iable. Columns (1)–(3) employ V- ac i i y, de ined as
he log o one plus he o al deal alue wi hin a coun y–indus y–yea (e.g., Haddad e al.,2017). In Columns (4)–(6),
VB- ac i i y is used, which is he a io o V- ac i i y o he numbe o i ms wi hin a coun y–indus y–yea . Bo h p oxies
cap u e, o some ex en , he alue componen o LBO deals, wi h la ge deals likely ha ing s onge implica ions o in-
dus y pee s. In all models, I employ CFA eg essions, using he esiduals om he i s s age o he espec i e LBO p oxy.
The indings om his analysis u he demons a e a signi ican e ec o hese al e na i e p oxies on he p o i abili y o
indus y pee s, ein o cing he main esul s p esen ed in Sec ion5.1.
I also analyze M&A dealsx i ins ead o LBOs, applying he same de ini ion o M&A ac i i y as o LBO ac i i y.
Since LBOs may signal he s a o a me ge sequence (Ha o d e al.,2016), which could also con ibu e o an in-
c eased akeo e h ea wi hin an indus y. Consequen ly, indus y pee s migh espond o M&A ac i i y. Howe e , I do
no ind a posi i e ela ionship be ween M&A ac i i y and he p o i abili y o indus y pee s (TableB3, AppendixA in
AppendixS1). Addi ionally, I in es iga e whe he he ETD in luences M&A ac i i y, bu I ind no e idence o sugges
ha he ETD impac s M&A ac i i y (TableB2, AppendixA in AppendixS1). This inding may help explain he mixed
e idence in he li e a u e ega ding ETD and akeo e e iciency gains (Dissanaike e al.,2021; Humphe y- Jenne ,2012;
Wang & Lah ,2017).
8
|
CONCLUDING REMARKS AND DISCUSSION
This s udy examines he impac o le e aged buyou s on indus y pee s wi hin he Eu opean con ex . Cu en ly, only
c oss- coun y s udies on he agg ega e indus y le el (Alda maz & B own,2020; Be ns ein e al.,2017) exis ha in-
es iga e he esea ch ques ion in mo e de ail. I p o ide new e idence a he indi idual pee le el, demons a ing ha
LBO announcemen s posi i ely in luence indus y pee s' p o i abili y. Using CFA eg essions, I employ he ETD as an
ins umen in he i s - s age eg ession and use he esiduals o co ec o he endogenei y o LBOac i i y. The indings
sugges ha he imp o emen in p o i abili y is a ibu ed o indus y pee s' mo e e icien asse u iliza ion and inc eased
cos e iciency.
Howe e , i also shows ha he iming o PE in es o s plays a c ucial ole as hey selec indus ies when hey a e a he
bo om o hei a e age p o i abili y. In his con ex , indus y de elopmen s, such as g ow h oppo uni ies and especially
unde alua ion, a e impo an ac o s in explaining he o e all e ec .
In pa icula , he a ibu ion o he selec ion channel di e s om o he s udies in he LBO con ex , which p ima ily
link he imp o emen s o posi i e compe i i e spillo e s (e.g., Alda maz & B own,2020) ha also s eng hen co po a e
go e nance (e.g., Feng & Rao,2022). Howe e , his s udy inds no e idence ha Eu opean pee i ms adjus hei ope a-
ions in esponse o a iables ha a e mo e suscep ible o hese channels.
Eu opean i ms gene ally ha e a less dispe sed owne ship s uc u e han US i ms (e.g., En iques & Volpin,2007).
Consequen ly, he p oblem o sepa a ion be ween owne ship and con ol is less p onounced in Eu ope; he e o e, pee
i ms do no need o imp o e hei in e nal co po a e go e nance s uc u es. Fu he mo e, he subsample analyses in
Sec ion6 indica e ha i ms wi h la ge sha eholde s bene i mo e om LBOs, sugges ing ha enhanced moni o ing
ac i i ies may incen i ize manage s o un hei i ms e icien ly. While indus y pee s, on a e age, do no make speci ic
adjus men s o hei co po a e go e nance, hey end o show g ea e imp o emen s when ope a ing in a coun y–indus-
y wi h high agency cos s. This sugges s ha he enhancemen s obse ed among indus y pee s may s em om e o s
o educe agency cos s.
Addi ionally, Eu opean LBO deals end o be smalle han US LBO deals,x ii which could in luence pee s di e en ly.
Fi s , la ge deals a e mo e likely o impac compe i ion wi hin an indus y. Second, he akeo e h ea is p obably lim-
i ed o smalle i ms. The subsample analysis e eals ha he posi i e e ec is mo e p onounced in he sample o i ms
wi h below- median size. Howe e , he e is no e idence o a educed skillse o PE in es o s in Eu ope compa ed o he
US. Thus, PE in es o s can exploi a o able ma ke and indus y condi ions.
In addi ion o he di e en sample ocus (Uni ed S a es s Eu ope) and using indi idual pee s ins ead o agg ega-
ion, he di e ence could also esul om analyzing all LBO deals a he han ocusing exclusi ely on public- o- p i a e
|
541
KATHAN
ansac ions. Resea ch on he spillo e e ec s o LBOs has p ima ily ocused on public- o- p i a e ansac ions
(e.g., Feng & Rao,2022; Ha o d e al.,2016; Oxman & Yildi im,2008; T uong & Walz,2024). Howe e , p i a e deals may
ha e di e en implica ions o indus y pee s. Fo ins ance, s udies ind a posi i e impac on he alua ion o a ge i ms'
pee s when he sample includes only public- o- p i a e LBOs (e.g., Feng & Rao,2022; Slo in e al.,1991), bu a nega i e
impac when he majo i y o deals a e p i a e- o- p i a e ansac ions (e.g., Hsu e al.,2011; Ka han & Tyk o á,2024).
S udies ha include p i a e deals, such as Ka han and Tyk o á(2024), ind a nega i e ope a ing pe o mance o in-
dus y pee s a e LBOs. Thei analysis is limi ed o a es ic i e sample o US deals, excluding many ansac ions. This
es ic ion may unde s a e he posi i e implica ions o LBO ac i i y on indus y pee s. Mo eo e , hei indings sugges
ha he nega i e e ec becomes conside ably smalle when hese es ic i e assump ions a e elaxed.
A po en ial limi a ion o my s udy is he ela i ely limi ed da a co e age o Eu opean i ms compa ed o ha o US
i ms. Howe e , I add ess some o hese da a limi a ions by ocusing on he la ges Eu opean economies, which accoun
o mos o Eu ope's GDP. Ne e heless, his app oach may es ic he gene alizabili y o he esul s.
DATA AVAILABILITY STATEMENT
The da a ha suppo he indings o his s udy a e a ailable om WRDS and LSEG Eikon. Res ic ions apply o he
a ailabili y o hese da a, which we e used unde license o his s udy. Da a a e a ailable om he au ho (s) wi h he
pe mission o WRDS and LSEG Eikon.
ACKNOWLEDGMENT
Open Access unding enabled and o ganized by P ojek DEAL.
ORCID
Manuel C. Ka han h ps://o cid.o g/0000-0001-6369-3404
Endno es
i The s udy includes he i e la ges coun ies in e ms o hei GDPs in Eu ope: F ance, Ge many, I aly, Spain, and he Uni ed Kingdom. They
also p o ide he mos buyou capi al in es ed in Eu ope (Alda maz & B own,2020). Addi ionally, he da a co e age o he a iables used in his
s udy is signi ican ly mo e comple e o he selec ed coun ies compa ed o o he Eu opean coun ies.
ii No e, a subs an ial p opo ion o p i a e deals do no disclose hei deal alue. Table1 epo s he a e age deal alue o he a ailable da a, which
is d i en by public and la ge p i a e deals.
iii Desc ip i e s a is ics on he dis ibu ion o pee i ms ac oss coun ies and indus ies a e p o ided in he AppendixA, TableA2.
i The numbe o obse a ions a ies ac oss a iables due o di e ences in he a ailabili y o da a o each espec i e a iable.
Fo he empi ical analysis, I use LBO o LBO ac i i y because many p i a e deals do no p o ide a deal alue.
i Minimum ules conce ning manda o y bid ule, b eak h ough ule, boa d neu ali y ule, squeeze- ou igh , and sell- ou igh . Fo mo e in o -
ma ion on he minimum ules, see Goe gen e al.(2005) and Cle c e al.(2012).
ii PE unds aim o acqui e ull owne ship in he majo i y o deals wi hin he sample, esul ing in an a e age owne ship s ake o 96.78%.
iii I closely ollow Dissanaike e al.(2021), who ely on he classi ica ion o Cle c e al.(2012) o map ETD- ela ed changes o he coun ies and
speci y he ea men and con ol g oup acco dingly.
ix Fo he con ol coun ies, he implemen a ion da es we e May 20, 2006, in F ance and he Uni ed Kingdom, and July 19, 2007, in I aly (Wang &
Lah ,2017).
x The a iables T ea and Pos a e collinea wi h he ixed e ec s.
xi In un abula ed esul s, I also pe o m he Os e (2019) diagnos ic es o unobse ed ac o s and coe icien s abili y in he second- s age eg es-
sion. The “B eakdown Del a” o an R2 o 1.00, which is 71.6%, p o ides e idence ha he indings a e no sensi i e o omi ed a iable bias.
xii Co po a e go e nance a iables a e e ie ed om Capi al IQ and Boa dex Eu ope. No e ha Boa dex Eu ope does no co e i ms om he
Uni ed Kingdom.
xiii I show he o mal de i a ion o he M/B decomposi ion in he AppendixB in AppendixS1.
xi The componen s show he de ia ions be ween a i m's ac ual and implied alue, which can be abo e o below he ac ual alue. Howe e , his
analysis ocuses on i ms ca ego ized as g ow h o unde alued i ms.
x I e ie e owne ship da a om Da as eam.
x i TableB1 and AppendixA in AppendixS1 p o ides desc ip i e s a is ics o M&A a ge i ms.
x ii In un abula ed esul s, he mean deal alue o US a ge s is 690.24 mio $ compa ed o 223.56 mio $ in Table1.
542
|
KATHAN
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