Researchers Ask Why Some Private Equity Firms Add Jobs After Buyouts

Scott Hsu, University of Arkansas
Photo by University Relations

Scott Hsu, University of Arkansas

FAYETTEVILLE, Ark. – The private equity industry has grown rapidly over the past 25 years. With this growth, private equity firms have increased their involvement in politics, which many view as controversial.

In a new study published in the Journal of Finance, a University of Arkansas finance professor and his colleague at Purdue University found that some private equity firms, despite their reputation as job destroyers, increased employment following a buyout. Most of these firms had political connections, and the jobs they created or retained after buyouts were concentrated during election years in swing states or states that the researchers identified as having “high corruption.”

“The general perception of private equity firms is they slash and burn after a buyout,” said Scott Hsu, assistant professor in the Sam M. Walton College of Business. “But we found the opposite for those firms with political connections. These firms, on average, actually created more jobs after buyouts, or at least eliminated fewer jobs, than firms with no political connections. When we dug a little deeper, we discovered that, on average, these firms tended to increase employment in election years, especially in states with greater corruption.”

Using U.S. Justice Department information on public corruption convictions, the researchers measured state corruption as the ratio of the number of public corruption convictions in a state over a 10-year period, 2001 to 2010, divided by the state’s population in 2010. They defined a state as “corrupt” if the quotient was above the median.

Private equity is a class of assets – both securities and debt – in companies traded on a stock exchange. A private equity firm manages investments for these companies through various strategies, usually leveraged buyouts but also venture capital. As the industry has grown over the past 25 years, firms have increased their involvement in politics. Private equity and investment firms contributed $50 million to candidates during the 2014 election cycle alone, according to the website opensecrets.org.

Firms’ greater and controversial involvement in politics motivated Hsu and Mara Faccio, finance professor at Purdue University, to do the study. They found that, on average, employment at companies with political connections increased by 1.24 percent every year. Companies that were not politically connected experienced employment increases, too, but those were much more modest – an increase of only 0.33 percent annually.

To determine a possible connection between politicians and private equity firms boosting employment, Hsu and Faccio combined data from several sources. Capital IQ enabled them to identify 3,748 firms that were acquired by private equity firms between 1990 and 2012. The National Establishment Time Series database, which provides annual sales and employment data for more than 52 million U.S. companies, allowed the researchers to track employment and growth at the targeted firms and their establishments, which included 20,000 subsidiaries, manufacturing plants and branches.

Hsu and Faccio established political connections by first gathering biographical information on senior employees at private equity firms. They classified a firm as politically connected if at least one general partner, board member or top executive had served in a major political office – U.S. Congress, governor or president – or was affiliated with someone in those roles during the period of the study. The researchers found that 14 percent of the 1,690 private equity firms covered in their sample were politically connected. A third of the acquired firms, 1,265, were purchased in group buyouts where at least one of the buyers was a politically connected private equity firm.

“Based on the number of politically connected indiviuals representing these firms, and the firms that later had boosts in employment, we think our findings suggest a possible exchange of favors between some private equity firms and incumbent politicians,” Hsu said.

About the University of Arkansas: The University of Arkansas provides an internationally competitive education for undergraduate and graduate students in more than 200 academic programs. The university contributes new knowledge, economic development, basic and applied research, and creative activity while also providing service to academic and professional disciplines. The Carnegie Foundation classifies the University of Arkansas among only 2 percent of universities in America that have the highest level of research activity. U.S. News & World Report ranks the University of Arkansas among its top American public research universities. Founded in 1871, the University of Arkansas comprises 10 colleges and schools and maintains a low student-to-faculty ratio that promotes personal attention and close mentoring.

Contacts

Scott Hsu, Assistant Professor, Finance
Sam M. Walton College of Business
479-575-2316, shsu@walton.uark.edu

Matt McGowan, science and research communications officer
University Relations
479-575-4246, dmcgowa@uark.edu

Headlines

The World as a Classroom: The Executive M.B.A. Program at U of A

The program, offered through the Sam M. Walton College of Business, blends online learning with face-to-face interaction and applied studies in a real-time international immersion trip.

Keri Blakinger, Author of 'Corrections in Ink,' to Speak at Fayetteville Public Library April 22

Blakinger, an award-winning journalist now at the Los Angeles Times, will talk about her memoir and her work as a reporter at 6 p.m. April 22 at the Fayetteville Public Library's Walker Community Room.

Visit With University Libraries and Pat Walker Health Center's Medical Services at Carnival Today

Employees are invited to meet fellow workers from units across campus including the University Libraries and the Pat Walker Health Center at today's Making Your Day Work Carnival at the Arkansas Union.

Farewell Reception April 3 for Fulbright College's Lisa Summerford

The campus community is invited to celebrate Summerford's achievements and to wish her well during a drop-in retirement reception from 3:30-5 p.m. Wednesday, April 3, in the Fulbright College Dean's Office in Old Main 523.

Rachel McGathy Retiring After 25 Years

There will be a reception to celebrate McGathy's retirement from 2:30-4:30 p.m. Friday, March 29, in the downstairs breakroom at Uptown East.

News Daily