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ReferencesAbramowitz, M. (1956), “Resource and Output Trendsin the United States since 1870”, American EconomicReview 46, 5–23.Baker, M., J. Stein and J. Wurgler (2003), “When Doesthe Market Matter? Stock Prices and the Investment ofEquity-Dependent Firms”, Quarterly Journal of Economics118, 969–1006.Griliches, Z. (1990), “Patent Statistics as EconomicIndicators: A Survey”, Journal of Economic Literature 28,1661–1707.Guo, S., E. Hotchkiss and W. Song (2007), “Do Buyouts(Still) Create Value?”, unpublished Working Paper, BostonCollege and University of Cincinnati.Hall, B. (1990), “The Impact of Corporate Restructuring onIndustrial Research and Development”, Brookings Paperson Economic Activity 1, 85–136.Hall, B. (1992), “Investment and Research and Development atthe Firm Level: Does the Source of Financing Matter?”, NationalBureau of Economic Research, Working Paper no. 4096.Hao, K.Y. and A.B. Jaffe (1993), “Effect of Liquidity onFirms’ R&D Spending”, Economics of Innovation andNew Technology 2, 275–282.Himmelberg, C.P. and B.C. Petersen (1994), “R&D andInternal Finance: A Panel Study of Small Firms in High-TechIndustries”, Review of Economics and Statistics 76, 38–51.Jaffe, A.B. and M. Trajtenberg (2002), Patents, Citationsand Innovations: A Window on the Knowledge Economy,Cambridge, MA, MIT Press.Jensen, M.C. (1989), “The Eclipse of the Public Corporation”,Harvard Business Review 67 (September–October), 61–74.Jensen, M.C. (1993), “The Modern Industrial Revolution,Exit and the Failure of Internal Control Systems”, Journalof Finance 48, 831–880.Kaplan, S.N. and J.C. Stein (1993), “The Evolution of BuyoutPricing and Financial Structure in the 1980s”, QuarterlyJournal of Economics 108, 313–357.Lanjouw, J.O., A. Pakes and J. Putnam (1998), “How toCount Patents and Value Intellectual Property: The Uses ofPatent Renewal and Application Data”, Journal of IndustrialEconomics 46, 405–432.Lichtenberg, F.R. and D. Siegel (1990), “The Effects ofLeveraged Buyouts on Productivity and Related Aspects ofFirm Behavior”, Journal of Financial Economics 27, 165–194.Muelbroek, L.K., M.L. Mitchell, J.H. Mulherin et al (1990),“Shark Repellents and Managerial Myopia: An EmpiricalTest”, Journal of Political Economy 98, 1108–1117Seru, A. (2007), “Do Conglomerates Stifle Innovation?”,unpublished Working Paper, University of Chicago.Shleifer, A. and L. Summers (1988), “Breach of Trust inHostile Takeovers”, in Auerbach, A.J. (ed.), CorporateTakeovers: Causes and Consequences, Chicago, Universityof Chicago Press.Solow, R.M. (1957), “Technical Change and the AggregateProduction Function”, Review of Economics and Statistics39, 312–320.Stein, J.C. (1988), “Takeover Threats and ManagerialMyopia”, Journal of Political Economy 96, 61–80.Strömberg, P. (2008), “The New Demography of PrivateEquity”, in Anuradha Gurung and Josh Lerner (eds.),Globalization of Alternative Investments Working PapersVolume 1: Global Economic Impact of Private Equity 2008,New York, World Economic Forum USA.42 Large-sample studies: Long-run investmentThe Global Economic Impact of Private Equity Report 2008
Private equity and employment*steven J davisUniversity of Chicago Graduate School of Businessjohn haltiwangerUniversity of Marylandjosh lernerHarvard Business Schooljavier mirandaUS Bureau of the CensusRon jarminUS Bureau of the Census1. IntroductionThe impact of private equity on employment arousesconsiderable controversy. Speaking about hedge funds andprivate equity groups in April 2005, Franz Müntefering, thenchairman of the German Social Democratic Party (and soonto be German vice-chancellor), contended that: “Somefinancial investors don’t waste any thoughts on the peoplewhose jobs they destroy”. 1Contentions like these have not gone unchallenged. Privateequity associations and other groups have released severalrecent studies that claim positive effects of private equity onemployment. Examples include the European Venture CapitalAssociation (2005), the British Venture Capital Association(2006), A.T. Kearney (2007), and Taylor and Bryant (2007).While efforts to bring data to the issue are highly welcome,these studies have significant limitations: 2• Reliance on surveys with incomplete response, giving rise toconcerns that the data do not accurately reflect the overallexperience of employers acquired by private equity groups.• Inability to control for employment changes in comparablefirms. When a firm backed by private equity sheds 5% ofemployment, the interpretation depends on whethercomparable firms grow by 3% or shrink by 10%.• Failure to distinguish cleanly between employment changesat firms backed by venture capital and firms backed byother forms of private equity. Both are interesting, but therecent debate focuses on buyouts and other later-stageprivate equity transactions, not venture capital.• Difficulties in disentangling organic job growth fromacquisitions, divestitures and reorganizations at firmsacquired by private equity groups. The prevalence ofcomplex ownership changes and reorganizations at thesefirms makes it hard to track employment using only firm-leveldata. Limiting the analysis to firms that do not experiencethese complex changes is one option, but the results maythen reflect a highly selective, unrepresentative sample.• Inability to determine where jobs are being created anddestroyed. Policy makers are not indifferent to whetherjobs are created domestically or abroad. Some viewforeign job creation in China, India and other emergingeconomies with alarm, especially if accompanied by jobcuts in the domestic economy.In this study, we construct and analyse a dataset thatovercomes these limitations and, at the same time,encompasses a much larger set of employers and privateequity transactions. We rely on the Longitudinal BusinessDatabase (LBD) at the US Bureau of the Census to followemployment at virtually all private equity-backed companiesin the US, before and after private equity transactions. Usingthe LBD, we follow employment at the level of firms andestablishments – i.e. specific factories, offices, retail outletsand other distinct physical locations where business takesplace. The LBD covers the entire non-farm private sector andincludes annual data on employment and payroll for about5 million firms and 6 million establishments.We combine the LBD with data from Capital IQ and othersources to identify and characterize private equity transactions.The resulting analysis sample contains about 5,000 US firms* University of Chicago Graduate School of Business; University of Maryland; US Bureau of the Census; Harvard Business School; and US Bureau of theCensus. Davis, Haltiwanger, and Lerner are research associates with the National Bureau of Economic Research, and Davis is a Visiting Scholar at theAmerican Enterprise Institute. We thank Ronald Davis and Kyle Handley for research assistance with this project and Per Strömberg for data on privateequity transaction classifications. Francesca Cornelli, Per Strömberg, a number of practitioners, and participants at the NBER “New World of PrivateEquity” pre-conference and the AEI Conference on “The History, Impact and Future of Private Equity” provided many helpful comments. The WorldEconomic Forum, the Kauffman Foundation, Harvard Business School’s Division of Research, the Global Markets Initiative at the University of Chicago’sGraduate School of Business and the US Bureau of the Census provided generous financial support for this research. The analysis and results presentedherein are attributable to the authors and do not necessarily reflect concurrence by the US Bureau of the Census. All errors and omissions are our own.1http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2005/10/14/cnmunt14.xml (accessed 3 November 2007). John Adler of the ServiceEmployees International Union uses less inflammatory language but offers a similar assessment: “Typically it’s easier to decrease costs quickly bycutting heads, which is why buyouts have typically been accompanied by layoffs”. (Wong, G., “Private Equity and the Jobs Cut Myth”, CNNMoney.com,2 May 2007 at http://money.cnn.com/2007/05/02/markets/pe_jobs/index.htm (accessed 10 December 2007). For remarks with a similar flavour byPhillip Jennings, general secretary of the UNI global union, see Elliot, L., “Davos 2007: Private Equity Under Fire”, Guardian Unlimited, 25 January 2007at http://www.guardian.co.uk/business/2007/jan/25/privateequity.globalization (accessed 10 December 2007).2See Service Employees International Union (2007) and Hall (2007) for detailed critiques. We discuss academic studies of private equity andemployment in Section 2 below.The Global Economic Impact of Private Equity Report 2008 Large-sample studies: Employment 43
Page 2 and 3:
The Globalization of Alternative In
Page 5:
ContributorsCo-editorsAnuradha Guru
Page 9 and 10: PrefaceKevin SteinbergChief Operati
Page 11 and 12: Letter on behalf of the Advisory Bo
Page 13 and 14: Executive summaryJosh lernerHarvard
Page 15 and 16: • Private equity-backed companies
Page 17 and 18: C. Indian casesThe two India cases,
Page 19 and 20: Part 1Large-sample studiesThe Globa
Page 21 and 22: The new demography of private equit
Page 23 and 24: among US publicly traded firms, it
Page 25 and 26: should be fairly complete. While th
Page 27 and 28: according to Moody’s (Hamilton et
Page 29 and 30: draining public markets of firms. I
Page 31 and 32: FIguresFigure 1A: LBO transactions
Page 33 and 34: TablesTable 1: Capital IQ 1980s cov
Page 35 and 36: Table 2: Magnitude and growth of LB
Page 37 and 38: Table 4: Exits of individual LBO tr
Page 39 and 40: Table 6: Determinants of exit succe
Page 41 and 42: Table 7: Ultimate staying power of
Page 43 and 44: Appendix 1: Imputed enterprise valu
Page 45 and 46: Private equity and long-run investm
Page 47 and 48: alternative names associated with t
Page 49 and 50: 4. Finally, we explore whether firm
Page 51 and 52: When we estimate these regressions,
Page 53 and 54: cutting back on the number of filin
Page 55 and 56: Table 1: Summary statisticsPanel D:
Page 57 and 58: Table 4: Relative citation intensit
Page 59: figuresFigure 1: Number of private
Page 63 and 64: Especially when taken together, our
Page 65 and 66: centred on the transaction year ide
Page 67 and 68: and Vartia 1985.) Aggregate employm
Page 69 and 70: sectors. In Retail Trade, the cumul
Page 71 and 72: employment-weighted acquisition rat
Page 73 and 74: FIguresFigure 1: Matches of private
Page 75 and 76: Figure 6:Figure 6A: Comparison of n
Page 77 and 78: Figure 8:Figure 8A: Comparison of j
Page 79 and 80: Figure 11: Variation in impact in e
Page 81 and 82: Figure 12: Differences in impact on
Page 83 and 84: Private equity and corporate govern
Page 85 and 86: et al (2007) track the evolution of
Page 87 and 88: groups aim to improve firm performa
Page 89 and 90: distribution of the LBO sponsors, m
Page 91 and 92: the most difficult cases. This stor
Page 93 and 94: to see whether these changes of CEO
Page 95 and 96: Figure 3:This figure represents the
Page 97 and 98: TablesTable 1: Company size descrip
Page 99 and 100: Table 5: Changes in the board size,
Page 101 and 102: Table 7: Board turnoverPanel A: Siz
Page 103 and 104: Part 2Case studiesThe Global Econom
Page 105 and 106: European private equity cases: intr
Page 107 and 108: Exhibit 1: Private equity fund size
Page 109 and 110: Messer Griesheimann-kristin achleit
Page 111 and 112:
ealized it was not possible to grow
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The deal with Allianz Capital partn
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the deal, the private equity invest
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Exhibit 1: The Messer Griesheim dea
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Exhibit 5: Post buyout structureMes
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New Lookann-kristin achleitnerTechn
Page 123 and 124:
feet. This restricted store space w
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institutional investors why this in
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Although a public listing did not a
Page 129 and 130:
Exhibit 5: Employment development a
Page 131 and 132:
Chinese private equity cases: intro
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Hony Capital and China Glass Holdin
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Hony’s Chinese name means ambitio
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Establishing early agreement on pos
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Executing the IPOEach of the initia
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Exhibit 1A: Summary of Hony Capital
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Exhibit 4: Members of the China Gla
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Exhibit 6A: China Glass post‐acqu
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Exhibit 8: China Glass stock price
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3i Group plc and Little Sheep*Lily
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y an aggressive franchise strategy,
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soul” of the business. But there
Page 155 and 156:
Exhibit 1: Summary information on 3
Page 157 and 158:
Exhibit 6: An excerpt from the 180-
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Indian private equity cases: introd
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ICICI Venture and Subhiksha *Lily F
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investment,” recalled Deshpande.
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2005 - 2007: Moderator, protector a
Page 167 and 168:
Exhibit 3: Subhiksha’s board comp
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Warburg Pincus and Bharti Tele‐Ve
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founded two companies at this time
Page 173 and 174:
By 2003 this restructuring task was
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Exhibit 1C: Private equity investme
Page 177 and 178:
Exhibit 4B: Bharti cellular footpri
Page 179 and 180:
Exhibit 6: Summary of Bharti’s fi
Page 181 and 182:
Exhibit 7: Bharti’s board structu
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In the 1993‐94 academic year, he
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consumer products. She was also a R
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AcknowledgementsJosh LernerHarvard
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The World Economic Forum is an inde
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