The Global Economic Impact of Private Equity Report 2008 - World ...

When we estimate these regressions, we find that the keyresults are robust to the use of fixed and random effectsspecifications. In particular, we find that in the four Poissonspecifications (with random and fixed effects, and withcontrols for individual years and a more parsimoniousspecification with the post‐investment dummy), the yearsafter the private equity investment are associated withconsistently more significant patents. The magnitudes of thecoefficients do not change appreciably from those in Table 3.The results are less signficant when we employ the NegativeBinomial specification with fixed and random effects incolumns (5) and (6), due to the additional flexibility of thismodel, but qualitatively similar.In the final column of Table 3, we employ an approachhalf‐way between the parsimonious specification of initialregressions and the fixed effects used in Table 4. Here,we control for one important aspect of these transactions.We focus on the type of the transaction, motivated by theconcern that the effects may differ across deals. Forinstance, public‐to‐private transactions are concentratedat the peaks of private equity cycles, which are oftentimes characterized by tremendous deal volumes and lowsubsequent returns (Kaplan and Stein 1993; Guo et al 2007).It is possible that the ability of private equity organizationsto add value to portfolio companies’ long‐run investmentstrategies is reduced during these peak periods.To explore these possibilities, we re‐run the regression,including interactions between the type of transaction andthe period after the private equity investment. (This regressionis estimated without a constant term.) The reportedspecifications include individual interaction effects forpublic‐to‐private, private‐to‐private, divisional buyouts andsecondaries (or financial sellers), using a Negative Binomialspecification and examining abnormal citation intensity. In this,and similar, specifications, we find coefficients less than onefor private‐to‐private transactions interacted with thepost‐LBO dummy. However, in this case, the post‐LBOdummy is greater than one, and largely offsets the below‐onecoefficients on the interaction terms. This effect can thus beinterpreted as a return to the mean after the transaction. Forsecondaries or financial sellers, the interaction variable isgreater than one. This suggests that the longer the companyis held by private equity groups, the greater the improvementin innovative investments. We also note that the secondarytransactions also start from a higher level of citation intensity.B. The fundamental nature of the patentsOne possibility is that the patents awarded to the firms aremore economically important, but the firms are sacrificingmore basic or fundamental research that will not yieldcommercial benefits for some time going forward.We thus turn to examining the fundamental nature of thepatents awarded to these firms, using the measures ofpatent originality and generality described above. In Table 2,we see that when we examine these measures, patentsapplied for after the private equity investments are somewhatmore general but less original than those applied forbeforehand. Once we adjust for the average generality andoriginality of awards in the same patent class and with thesame grant year, these differences essentially disappear.A similar conclusion emerges from the regression analysesin Table 5. When we run regressions akin to those in earliertables (now employing an ordinary least‐squares specification),we find initially that the awards applied for after the privateequity investments are somewhat more general and lessoriginal. 10 Once we add the originality and generality of theaverage patent in the same class and grant year asindependent variables, the significance of these differencesessentially disappears. Thus, private equity investments donot seem to be associated with a change in the extent towhich the (patented) research being pursued is fundamental.C. Robustness checks of the patent quality analysesIn undertaking the analyses of patent quality, we neededto make a number of assumptions. In this section, wesummarize the results of unreported supplemental analyses,where we relaxed these assumptions.One issue was posed by private equity investments wherethere was already an existing investor. These investmentsare typically secondary buyouts, where one sponsor buysout the stake of another. As a result, some patents maybe double‐counted: they may be simultaneously prior toone transaction and after another. We repeat the analysis,employing these patents only the first time they appear andthen dropping them entirely. The results are little changed.A second concern was posed by our measure of patentcitations. As discussed above, the number of citations toa given patent in each year is strongly serially correlated,so we should identify the same set of patents as heavilycited ones whether we tabulate citations after two, threeor five years. Using a long window to identify citations,though, will enhance the accuracy of our identification ofimportant patents but reduce our sample size. We repeatthe analysis, using citations through the end of the secondcalendar year after the patent grant, as well as after thefourth year. The results are qualitatively similar to thosereported in Tables 3 and 4.A third concern has to do with what we term “cherry picking”in divisional buyouts. In particular, we worried that corporateparents, when they determine which pending patentapplications will be assigned to the firm at the time of thebuyout, will select only low‐quality patents: the best patents,even if very relevant to the target firm, will be retained by thecorporate parent. This tendency might lead to an apparentincrease in quality in the patents applied for after the award,while all we are really seeing is an unbiased sample of theunit’s patents.10The sample size is smaller in regressions examining generality because this measure requires that patents be subsequently cited to compute.The Global Economic Impact of Private Equity Report 2008 Large-sample studies: Long-run investment 33