Argentum, in cooperation with NHH and SIFR, will arrange the Argentum Conference and Symposium in Stockholm this September. One of the objectives is to highlight the latest in private equity research. Leading up to the conference, we will present an introduction to each of the papers that will be presented each week.

Jörg Rocholl (ESMT European School of Management and Technology): Competitive Effects of Private Equity Investments

Co-authors: Hung-Chia Hsu and Adam V. Reed

This paper analyzes companies that compete with companies that receive private equity investments. The study finds that competitors experience a decrease in their stock prices and their operating performance around private equity investments in their industry. The study also finds that the level of specialization, corporate governance, technological innovation, managerial incentives and efficiency are all related to performance differences among competitors at the time of the private equity investment.

Recent research have highlighted the positive effects on target companies of private equity investments, but the reason for these effects are uncertain. This paper analyzes the reaction of the companies that compete with those companies that receive an investment from a private equity firm. If private equity investments make target companies more competitive, we should expect a negative reaction in stock prices and operating performance of their competitors following a private equity investment.

The paper analyzes how the market views private equity investments as positive news by analyzing the competitor's stock price reactions and finds that other companies are doing less well after the private equity investment in the target company. Competitors see a decrease in their stock prices around private equity investments in their industry.

The second goal of the paper is to analyze the underlying sources for the increase in competitiveness. The authors identify five possible determinants of the competitive advantage of private equity backed companies and analyze these determinants through empirical testing.

Based on earlier research, the following five determinants of competitive advantages are analyzed in detail:

• Whether a higher degree of specialization leads to more negative consequences for competitors
• The impact of the change in corporate governance in private equity-backed companies
• The impact of technological innovations
• The importance of managerial incentives
• The impact of cost efficiency on competitors' performance

The paper finds that competitors fare better when the private equity investor in the target company has less industry specialization, if the competitors have a better system of corporate governance, more technologial innovation, more aligned managerial incentives and if they are more cost-efficient.

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