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New Study from NYU Stern Demonstrates That Politics Shape Buyout Performance

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In publishing the first empirical evidence measuring the influence of the political views of states on the volume of buyout activity and outcomes of buyout transactions, NYU Stern Assistant Professor of Management Aviad Pe’er, with Oliver Gottschalg of HEC School of Management in Paris, found that Republican political views positively impact both the volume and performance of buyouts, while the Democratic political views have negative impacts. Pe’er and Gottschalg’s research appears in the November 2008 issue of Harvard Business Review.

Based on data of 5,870 U.S. buyouts by private equity firms made between 1980 and 2003, and based on majority vote in 1988 to 2000 U.S. presidential elections, the professors evaluated the impact of states’ political views on buyout performance and found:

  • A company headquartered in a red state is 10 percent more likely to undergo a buyout than an otherwise identical company based in a blue state.
  • The average performance of buyouts in red states is 8 percent higher than in blue states. This finding is consistent with the assertion that the Republican Party Platform is more aligned with the mechanisms by which buyouts create value to shareholders, while the Democratic Party Platform likely impedes it by increasing costs associated with including additional stakeholders.
  • When the political views of a state shifted toward a Republican dominance, buyout activity increased approximately 18 percent and the likelihood of a successful buyout outcome increased 14 percent.

Their research results held even after controlling for other factors that could explain performance differences, including the target firm’s size, age and sector, the historical performance of buyouts in its sector, the performance of the acquiring firm, and unionization.

"The current financial uncertainty may foster more buyout activity in the near term, especially in the aftermath of the November presidential election," said Pe’er. "Acquirers and sellers should pay close attention as states potentially change allegiance. Acquirers who develop location-specific valuation skills are able to generate higher returns than their counterparts who lack these skills."

View Pe’er’s and Gottschalg’s Harvard Business Review article and the full research paper on which the article is based.