Better Than Business School?

Serving private equity owners leaves marks on CEOs’ management style, research finds.

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Getting bought out by a private equity firm leaves a lasting impact on the acquired company’s executives, new research from the University of Arkansas found.

CEOs who have worked under private equity management tend to employ their previous bosses’ cost-cutting and value creation strategies when they join public companies, according to business school professors Scott Hsu and Tomas Jandik and graduate research assistant Juntai Lu.

This includes being more likely to file patents, conduct “value-enhancing” mergers and acquisitions, and improve operating efficiency. It also means less investment in the firm and more layoffs, the authors found.

“Intensive work experiences in the [private equity] buyout targets may leave a footprint on a CEO’s management style that may later be observed in the subsequent firms he or she is running,” the authors wrote.

For the study, the researchers analyzed the management style of 311 public company CEOs who previously held executive roles at companies that were bought out or taken private by private equity firms between 1980 and 2016. About a third of these CEOs were formerly chief executives at a private equity portfolio company; the rest held other executive positions such as chief operating officer or chief financial officer.

“Consistent with cost cutting as one of the primary initiatives of PE firms, public firms with CEOs who previously worked as the CEOs of PE targets tend to cut more capital expenditures and employment,” Hsu, Jandik, and Lu wrote in their paper.


Specifically, they found that these CEOs, on average, reduced investment in their firms by 34 percent and cut employment by 21 percent within the first two years after taking office, compared to similar firms led by CEOs who haven’t worked under private equity ownership.

Such cost-cutting tendencies were more pronounced among CEOs with recent experience as a private equity target or at firms acquired by “more reputable” private equity managers. The same goes for CEOs whose former private equity owners were “prone to cutting more investment and/or employment,” according to the paper.

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At the same time, the authors found that CEOs who have led private equity portfolio companies were 17 percent to 25 percent more likely to file patents. The authors suggested this indicated a commitment to “enhance long-term growth and competitiveness.”

These chief executives also conducted more mergers and acquisitions compared to their peers — and earned 1.3 percent higher returns in the 21-day window surrounding merger announcements, the study found.

In addition, the authors determined that firms run by these CEOs had higher measures of operating efficiency and took on more leverage. Overall, they found that public companies whose CEOs previously led private equity portfolio companies create more value on average.

“In addition to cost cutting, PE firms also engage in the value improving,” the authors wrote. “CEOs who previously worked in the PE target may thus follow the same initiatives taken by PE firms by cutting capital expenditures and employment, encouraging patented innovations, pursuing growth, and improving operating efficiencies.”