Private Equity and Long-Run Investment: The Case of Innovation

A long-standing controversy is whether LBOs relieve managers from shortterm pressures from public shareholders, or whether LBO funds themselves sacrifice long-term growth to boost short-term performance. We examine one form of long-term activities, namely investments in innovation as measured by patenting activity. Analyzing 472 LBO transactions, we find no evidence of any decrease in these activities. LBO firm patents are more cited (a proxy for economic importance), show no shifts in the fundamental nature of the research, and become more concentrated in important areas of companies' innovative portfolios. These findings are inconsistent with the hypothesis that LBOs sacrifice long-run investments. Harvard University and National Bureau of Economic Research; Columbia University, NBER, and SIFR; and Institute for Financial Research, CEPR, and NBER. We thank Geraldine Kim, Jodi Krakower, Sanjey Sivanesan, and especially Sarah Woolverton for assistance with this project. The World Economic Forum and Harvard Business School’s Division of Research provided financial support for this research. We are grateful for helpful comments from participants in the American Economic Association, European Finance Association, NBER Summer Institute, and Western Finance Association meetings, the World Economic Forum “Global Economic Impact of Private Equity” project, and various seminar participants, especially Bronwyn Hall, Laura Lindsey, Paul Oyer, Mark Schankerman and John van Reenen. Many thanks also to Campbell Harvey (the editor) and two anonymous referees, whose comments greatly improved the paper. All errors and omissions are our own.