Who does private equity buy? Evidence on the role of private equity from buyouts of divested businesses

Research Summary: We examine the role of nonventure private equity firms in the market for divested businesses, comparing targets bought by such firms to those bought by corporate acquirers. We argue that a combination of vigilant monitoring, high‐powered incentives, patient capital, and business independence makes private equity firms uniquely suited to correcting underinvestment problems in public corporations, and that they will therefore systematically target divested businesses that are outside their parents’ core area, whose rivals invest more in long‐term strategic assets than their parents, and whose parents have weak managerial incentives both overall and at the divisional level. Results from a sample of 1,711 divestments confirm these predictions. Our study contributes to our understanding of private equity ownership, highlighting its advantage as an alternate governance form. Managerial Summary: Private equity firms are often portrayed as destroyers of corporate value, raiding established companies in pursuit of short‐term gain. In contrast, we argue that private equity investors help to revitalize businesses by enabling investments in long‐term strategic resources and capabilities that they are better able to evaluate, monitor, and support than public market investors. Consistent with these arguments, we find that when acquiring businesses divested by public corporations, private equity firms are more likely to buy units outside the parent's core area, those whose peers invest more in R&D than their parents, and those whose parents have weak managerial incentives, especially at the divisional level. Thus, private equity firms systematically target those businesses that may fail to realize their full potential under public ownership.     

Taking a hit to save the world? Employee participation in a corporate social initiative

Research Summary: Companies often justify their corporate social initiatives by citing talent management benefits. We examine the extent of, and the reasons for, employee interest in such an initiative in a global management consulting firm. We find a large fraction of employees to be interested in participation in the initiative even when participation requires a personal sacrifice in the form of a salary cut. However, this interest is driven not just by prosocial motivation: Expectations regarding private benefits, such as improved career prospects from new skills acquired, also play a role. Considerations of social impact and private benefits are equally salient when no salary cut is required, but private considerations become more prominent when participating employees are asked to accept a salary cut. Managerial Summary: Many companies are moving from stand‐alone corporate social responsibility (CSR) projects to social initiatives integrated into strategy. Providing employees with the opportunity to participate in such initiatives is said to help attract, motivate and retain talent. In this study, carried out in collaboration with a management consulting firm, we examine how much and why employees value participation in a corporate social initiative. Based on interviews and survey data, we find that employees are not only interested in, but often even willing to accept, a temporary salary cut for the opportunity. However, altruistic motivation is not the only driver of this interest: Employees also expect and value the possibility that the experience would lead to private benefits, such as developing skills likely to enhance their career prospects.     

Cross-Country Evidence on Public Sector Retrenchment

This article reports the results from a survey of public sectoremployment retrench-ment episodes across a wide variety of developingand transition economies. The information collected and analyzedis primarily from internal World Bank documents and in-depthinterviews with World Bank staff having operational informationabout experiences in specific countries. Using the informationcollected on 41 retrenchment programs across 37 countries, thearticle analyzes the relationships between the factors leadingto retrenchment, the scope and nature of retrenchment, and themethods used to accomplish the retrenchment. The discussionof methods includes an analysis of the mix of involuntary andvoluntary employment reduction programs, the compensation schemesoffered, and the extent of targeting of specific types of workers.Although relevant quantitative information is limited, the articlealso attempts to evaluate the outcome of the programs on severaldimensions. The most striking findings relate to analysis ofthe factors leading a significant fraction of programs to rehireworkers separated from the public sector (thereby defeatingthe programs'objective). In addition, the article relates programcharacteristics to calculated summary financial payback indicatorsand to the nature of the labor market adjustment.     

Performance of Dairy Plants in the Cooperative and Private Sectors in India

During the 1990s the cooperative dairy processing sector in India was exposed to greater competition from private sector plants. In this paper we measure cost efficiency (decomposed into technical and allocative efficiency) at the dairy plant level in the cooperative and private sectors in India. Two efficiency measurement methods are used: stochastic frontier analysis (SFA) and data envelopment analysis (DEA). The study utilizes an (incomplete) panel data sample of 23 plants, comprising 13 cooperative plants and 10 private plants, observed between 1992/93 and 1996/97. Our results indicate that cooperative plants are more cost efficient than private plants, although this difference is insignificant at the 5 per cent level. Furthermore, we observe that the cost efficiency of cooperative plants has not improved since market liberalization in 1991. These results suggest that the liberalization policy has not yet realized its expected benefits, and also cause us to question the general expectation that private operators will have efficiency advantages relative to cooperatives.     

THE RELATIVE INCOME HYPOTHESIS-A CROSS COUNTRY ANALYSIS

This paper presents an attempt to examine the applicability of the relative income hypothesis (RIH) in terms of its various specifications proposed by Duesenberry, Duesenberry, Eckstein and Fromm (DEF), Davis and the authors (MD). Using the time series data for 1951 through 1968 the analysis has been carried out for Canada, Finland, Guatemala, Honduras, India, Japan, Philippines, Sweden, United Kingdom and the United States. It is found that RIH provides a fairly good representation of the consumption behaviour of all the countries included in the study. All specifications, however, do not perform equally well. DEF and Davis functions score the maximum points; MD comes at par with DEF in case of Finland, Guatemala, and India. The original Duesenberry specification performs very poorly. This leads us to conclude that the process of habit formation is continuous contrary to what is implied by Duesenberry's original specification and that consumption is a better indicator of the standard of living than income is. Estimates of the long-run marginal propensities to consume are essentially the same as those computed from the permanent income hypothesis by Singh and Drost [1970]. This lends support to the view that the two hypotheses have essentially the same long-run implications.     

Group actions and the law: A case study of Social Action Litigation and consumer protection in India

Social Action Litigation (SAL)¹ as an instrument for securing socioeconomic justice for the underprivileged has been one of the outstanding developments in the contemporary Indian legal world. Though the origin is American,² since its inception in the late 1970s SAL has undergone significant developments and has now acquired legitimacy in India. It has certainly revolutionised modern Indian public law and has more recently played an important role in environmental⁴ and consumer protection. The object of the present paper is to discuss the role of Social Action Litigation and to highlight new developments in the context of the newly emerging consumer protection jurisprudence in India.

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Verbandsklagen und Rechtsdurchsetzung: eine Fallstudie zu Klagen im öffentlichen Interesse und Verbraucherschutz in Indien

Zusammenfassung Klagen im öffentlichen Interesse als ein Instrument zur Sicherung sozioökonomischer Gerechtigkeit für interprivilegierte Bevölkerungsschichten sind eine der herausragenden Entwicklungen im zeitgenössischen Recht. Ursprünglich in Amerika entwickelt, sind Klagen im öffentlichen Intresse seit ihrer Einführung in Indien in den spÄten 70er Jahren wesentlichen Entwicklungen unterworfen gewesen und haben inzwischen LegitimitÄt erreicht. Sie haben sicherlich das moderne indische öffentliche Recht revolutioniert und haben in der jüngsten Vergangenheit eine wichtige Rolle beim Umweltschutz und beim Verbraucherschutz gespielt. Der Beitrag diskutiert die Rolle der Klagen im öffentlichen Interesse und hebt neuere Entwicklungen im Zusammenhang mit dem neu entstehenden Verbraucherrecht in Indien hervor.

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The author wishes to express his gratitude to Dr. Werner F. Menski, Senior Lecturer in Laws, School of Oriental and African Studies, University of London, for his valuable comments on an earlier draft of this paper.     

On the exact variance of an unbiased product type estimator and its comparison with the sample mean

We consider the usual product estimator adjusted for its bias, considered by Robson (1957). The exact variance of this estimator has been obtained through a direct method. Its superiority over the sample mean and the product estimator is demonstrated. The research of these authors has been partially supported by their respective NSERC grants A3661 and A3989.     

The ‘Basic Needs’ approach to development vs the new international economic order: The significance of Third World industrialization

The question has recently been raised whether the basic needs approach to development conflicts with Third World aspirations for faster industrialization and the establishment of the New International Economic Order. This paper argues: (a) That to meet the basic needs of the poor in the Third World on a sustainable basis, it is necessary to transform its productive structures. In this transformation modern industry (including in most cases an appropriate capital goods industry) must play a central role. (b) That a properly conceived basic needs strategy should in general positively aid Third World industrial development. The paper concludes that accelerated industrialization and a substantially redistributive fiscal policy must be the two pillars of any effective basic needs programme.     

Productivity and economic growth in East Asia: innovation, efficiency and accumulation

This paper uses a varying coefficients frontier production function model to examine the sources of growth between 1987 and 1993 in four East Asian economies—Hong Kong, Singapore, Japan and South Korea. Using data for 20 manufacturing sectors at the three-digit SIC level, this study provides the first comprehensive examination of sources of growth that allows one to decompose total factor productivity growth, separating out technical efficiency changes (TECs) from technological progress (TP). We find that while there is ample evidence of the importance of increasing inputs in growth, and there is some support for technical efficiency change, or catching up to the frontier over this period, there is weak or even negative evidence for the role of technological progress, measured as a shift in the estimated production frontier.     

A Model of Inequality and Interest Group Politics

In this paper we examine inequality of process and inequality of outcomes in interest group politics. The model has interest groups that compete for rents in a non-cooperative game. It allows for a self-interested rent-setting political decision-maker, and democratic or popular pressure as a check on that self-interest. We consider differences in the effectiveness and pre-commitment abilities of interest groups. We show that: (i) the costs of influence activities may be highest when groups are relatively equal in their effectiveness; (ii) if social welfare incorporates enough concern for equity of outcomes, that ranking is reversed; (iii) depending on voter responsiveness to rent-setting, the political decision-maker may set rents to be higher or lower, when increases in inequality of effectiveness lower the unit costs of rent-seeking.